Due to the long lockdowns necessitated by the Covid-19 crisis, a large number of people couldn’t go to work. Many people witnessed job losses, salary reductions, or income losses. However, those who had sufficient contingency funds somehow managed to meet their financial obligations despite the tough circumstances. Others who didn’t have sufficient level of contingency savings struggled to meet even essential financial commitments. As such, the first lesson of 2020 should be to build and maintain an emergency fund which can sustain you and your dependents for 6-8 months in the absence of your regular source of income. During an unanticipated crisis, like the one we saw in 2020, your goal should be to cut down on unnecessary expenses so that your emergency fund can be used efficiently to meet your most critical financial commitments like rent, EMIs, groceries, utilities, etc. without lending support. You must also aim to replenish your fund at the earliest after your finances stabilise.
2. You can’t take your health insurance requirement lightly
It’s not uncommon for people to neglect their health insurance requirements during normal situations. But when they suddenly face a health emergency, especially during a financial crisis, they experience a double whammy! The steep hospitalisation expenses drain their precious savings leaving them in an extremely vulnerable position. So, the second big lesson of 2020 is to ensure you have a health insurance plan with a sum insured of at least Rs. 5-7 lakh, especially if you stay in a big city. You should also consider getting a medical policy for yourself and your dependents because your office-provided group insurance plan will cease to exist if you lose your job. Finally, remember the premiums will only increase as the insureds get older, so there’s no time to lose.
3. Patience and diversification are crucial when investing
When you invest, your key purpose should be to achieve your financial goals in time. In 2020, the equity market witnessed huge volatility due to Covid-19 related uncertainties. Some debt funds also performed poorly. Many investors who had invested in a single instrument faced significant negative returns. Many investors who were facing financial difficulties were also forced to liquidate their investments while they were in losses.
You should remember the lesson from the 2020 experience that investments require patience because you may invite losses in panic. You should also diversify your investments optimally into different asset classes like equity, gold, debt products, etc. in line with your returns expectations and risk tolerance, so that you can keep your overall risk under control and achieve desired returns amid a volatile market.
4. Unnecessary loans can be highly risky
2020 tested people’s ability to exercise financial discipline. Excessive loans are bad in every situation, but it can destroy your finances during a major crisis. Many who had taken unnecessary high-interest loans during the first quarter of the calendar year 2020 faced difficulties in repaying them during the remaining course of the year. After the lockdown was announced, people could not go to their offices, and their income had gone haywire. In such a situation, people having unnecessary loans faced an extra financial burden. Though the Reserve Bank of India had announced a moratorium facility for people struggling to repay their loans, interest on the loan continued to accrue and increased their loan obligation.
You should learn that unnecessary loans can be bad for your financial health. Always use loans as a helping tool to timely achieve your critical financial goals.
5. Invest regularly
Whether it’s a normal or a difficult phase, you must aim to invest regularly in a disciplined manner. In the first quarter of 2020, the equity market dipped furiously. The equity mutual funds’ NAV also fell sharply. Some investors stopped their SIPs in anticipation of a further fall in the equity market. However, after a few months, the equity market started reviving, and by the end of 2020, the Sensex has made a new all-time high! You should learn from the 2020 experience that investments should be made regularly. When you do so, you can earn good returns as the market volatility will average-out in the long term.
In conclusion, 2020 triggered many situations which were not under our control. However, going forward, we need to plan and maintain a disciplined and pragmatic approach so that we can make better decisions about the things that are in our control, like our emergency savings, insurance protection level, loans and investments. These lessons will go a long way to ensure our finances suffer minimum damage if we face any unprecedented crisis in the future.