With the nationwide lockdown owing to the Covid-19 pandemic, self-employed are most impacted than their salaried counterparts. Given the irregular cash flows and absence of employer-provided group health covers, they are completely on their own to ensure their financial shortfalls and health security in such a situation. While staying physically healthy and preventing the spread of Covid-19 are top priorities for all, managing personal finances is also paramount, especially in case of the self-employed.
Let’s discuss some smart money moves for self-employed individuals to ensure financial fitness amid the Covid-19 crisis:
1. Enhance emergency fund
While salaried individuals should maintain an emergency fund equalling their mandatory monthly expenses of at least 6 months, self-employed individuals lacking income certainty should maintain this fund on the higher side covering monthly mandatory expenses of at least 9 to 12 months. However, as the Covid-19 pandemic has impacted the global economy, there may be long-term repercussions of the current volatility. In such a case, it is crucial to enhance your emergency fund to be in line with your responsibilities and requirements. Your contingency fund will come to your rescue if you face any loss of income in the near future owing to this pandemic.
As emergencies come unannounced, you should park funds in ultra-short duration funds and high-yield saving accounts. Doing so would offer you higher level of capital protection features and liquidity than other debt funds while yielding higher returns than regular saving accounts. Stepping up your emergency fund would also minimise your dependency on borrowed funds in time of contingency.
2. Go digital to repay EMIs
In this turbulent situation, you can still stay on top of your finances by servicing your EMIs, SIPs, insurance premiums and various other payments digitally. Instead of using cheques or cash for payments, opt for digital payment modes such as UPI, online banking, e wallets etc. Routing your payment via digital mode will not only enhance social distancing in such a situation, it will also save you from defaults or delayed payments.
3. Review your health insurance
Health insurance is one of the best financial instruments that one can procure as it not only covers your future medical illnesses but also Covid-19. On 4th March 2020, IRDAI directed all the insurers to cover Covid-19 cases in their existing policies and also ensured they expeditiously attend to all such claims. Depending on your insurer, your coverage for health policies may include pre or post hospitalization expenses, ambulance costs, quarantine expenses, hospitalization tests, etc. As self-employed are devoid of employee group health policies, which is present in case of their salaried counterparts, make sure you purchase health policies with adequate cover to protect yourself and your family from steep hospitalization costs. However, note health insurance taken anew may be subject to thirty days waiting period, i.e. the expenses related to hospitalization would be covered only after the completion of thirty days from the policy issue date.
4. Continue paying your loan and credit card dues
While the RBI has announced a 3-month moratorium on loans and credit card dues, individuals should try their best to continue repaying dues on time to prevent accrual of interest on their outstanding dues during the moratorium. The accrual of interest on loans and credit cards would increase your total due payout. Only those borrowers who are unable to meet their term loans owing to adverse impact on their cash flows due to lockdown should opt for the moratorium. Those credit cardholders who are unable to meet their credit card dues should avoid opting for moratorium owing to high finance charges which range anywhere between 23% and 49.36%. Instead, they should repay their dues by opting for balance transfer or by converting their big ticket spends into EMIs to repay them back into smaller instalments. While balance transfer to an existing card would provide you with a promotional interest period of 2 to 6 months during which nil or lower finance charges are incurred, EMI conversions would come at lower interest rate than credit card’s finance charges.
5. Avoid discontinuing with investments
As a knee-jerk response to steep market corrections, many investors tend to redeem their existing mutual fund investments owing to panic selling in equities. Self-employed investors should instead focus on their long-term goals and use this as an opportunity to implement their asset allocation strategy to restore original asset mix. For this, you should consider redeeming your fixed income investments to top up your existing and new equity investments. Doing so would not only allow you to purchase more units at lower NAVs but also would reduce their average investment cost. This would further help you generate bigger corpus when the market rebounds, thereby assisting you to reach your financial goals sooner.
On the contrary, in case of lumpsum investments, make your investments in a staggered manner as it is difficult to predict the bottom and duration of any bearish phase. Ignore using your emergency fund while making lumpsum investment in equities as any financial emergency during bearish periods may force you to sell off your equity funds at a loss.
(The author is CEO & Co-founder, Paisabazaar.com)