By CA Manish P Hingar
Succeeding the current global inflation and recession hazard, over the past few weeks, we have been hearing about layoffs in many well-renowned companies. Netflix, Amazon, Microsoft, Twitter, Meta, and Byjus in India have announced job cuts.
As per some reports, more layoffs are expected to take place in the next few months. So, we can say that owing to the economic slowdown and impending recession, companies are on a layoff spree.
Thus, winter is coming in the form of mass layoffs. While we cannot avoid this situation, we can definitely try to protect ourselves financially and combat this situation by taking suitable precautions.
Through the following points, let us discuss how you can be well-prepared for a layoff.
Emergency fund
The first and most important thing you need to do is to maintain an emergency fund. Saving money in an emergency fund will enable you to manage your daily or monthly expenses even when you have stopped generating income for a while. Suppose, due to an unfortunate circumstance, you had to quit your job or your company is in the process of downsizing, you will still be able to manage your expenses until you find another stable source of income.
Ideally, around six months of your monthly expenses should be set aside in an emergency fund. Analyze the industry you work in and determine if your emergency fund should be for an extended period or not so that you are well prepared for any emergency that might come up in the near future.
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If you feel your job sector is riskier, and there are more chances of a layoff, then make sure that you have at least eight months of expenses set aside.
Now, the next question is, where to invest this emergency fund? There are two things to bear in mind. First, you need to pick an investment avenue that is not highly volatile. It should be a comparatively safer investment option.
Secondly, it should be liquid. So, whenever you need this money, it should be readily available. Consider these two things before investing in an emergency fund.
One important point we would like to add here for emergency funds is that it is not a one-time activity. If you are using a certain part of your emergency fund, make sure that you refill it again. So, at any point of time, you should have around six months of expenses.
If you have used, let’s say, one or two months of expenses, then make sure to replace the amount as soon as possible. Also, with an increase in your income on a year-on-year basis, make sure to increase your emergency fund.
Health insurance policy
The second essential thing that you need to take care of in order to be prepared for a layoff is to make sure that you have an adequate health insurance policy in place. Not just your own health insurance, but also an insurance policy that covers all your family members.
This means you should have one family floater cover for you, your spouse, children, your parents, and any other family member you have.
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However, people avoid another plan as their employer already covers them. But, it is crucial to understand that, if your employer is giving you the benefit of a health insurance policy, that is usually a group health insurance plan.
It is indeed a great benefit provided to you by your company, but relying 100% on that is not a wise decision. Especially looking at the current layoff scenario, if people would have been dependent solely on the health insurance plan provided by the employer, these people, after losing their job, wouldn’t have a good source of income.
Additionally, if any medical situation arises, they won’t have any health insurance plan as well. So, make sure apart from what your company is providing, you have separate health insurance coverage that is taking care of you and your family’s health-related needs.
Moreover, if you already have a health insurance plan from your employer, you can always go for top up covers to enhance the coverage without paying a very high premium. But, if you’re doing this, you must ensure that whatever base cover you are considering as the cover your company is providing will be treated as deductible.
And in case of any hospitalization, that particular amount will be paid by your company. Or if you do not have a job at that point of time, you will have to bear the expense. After keeping this in mind, you can take a topper or a base cover separately.
Budgeting
The third important thing you need to keep in mind to prepare for a layoff is making a proper budget. Whatever income you’re generating right now, make sure you are not spending too much of it and are creating a reasonable budget.
You should have a clear bifurcation of your mandatory and wishful expenses. Try to curb your wishful or avoidable expenses and only focus on your mandatory ones. This way, you can increase your savings, which can be utilized to create your emergency fund much faster.
Managing EMIs and loans
The fourth point is your loan. This is related to the third point, i.e., budgeting. When you’re making a budget for yourself, make sure that you’re not allocating too much of your money toward EMIs. Let’s say you have a home loan or personal loan, try to pre-pay it as early as possible, and do not be over-dependent on EMIs.
Because in the future, if you lose your job, you will not only have to manage your household expenses but will also be burdened by your EMIs.
If your EMIs are a small or manageable amount that can be taken care of from your emergency fund for a few months, then it would be a favourable situation. But if your EMIs are significant and there is overdependency on loans, then it will be tough for you to take care of expenses once you stop having any regular source of income.
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So, please note that your EMIs should be at most 30% of your in-hand income. At any point in time, it should be below this limit. If you go overboard with your EMI payments, it will hamper your cash flow. Make sure you do not take too many credits at a single time.
If you feel the need to take a loan to fulfill your aspirations and wishes, only go for it if the EMIs are below 30% of your in-hand income.
Creating multiple sources of income
Now, the fifth most important thing that you need to take care of is creating multiple sources of income for yourself. Given the current scenario where we are expecting layoffs, depending solely on one particular income source is very risky.
On the contrary, if you have multiple sources of income, you won’t have to worry much, and a layoff won’t give you too much mental stress.
But how to create multiple sources of income? Frankly, this cannot be done overnight. It will take you some time to enter a situation where you have various sources of income. For instance, when you own any property, the rental income that you’re getting from it, or maybe if you have investments, the interest income or capital gains that you generate from that, or perhaps some side income that you can generate through your creative pursuits, etc., are some ways.
But like we said, it won’t happen overnight. Hence, you should try consulting a finance expert who can help you create a plan for yourself so that you have diversified sources of income in the coming years.
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Conclusion
These were some of the most crucial things you need to remember to create a solid financial base for yourself during such uncertain times. But apart from this, we would like to give you another additional point.
If you come into a situation wherein you lose your job, you might start looking at your portfolio and investments. And try to liquidate those investments to meet your expenses if you do not have a sufficient emergency fund in place.
In such a situation, liquidating your investment becomes your only option. We suggest refraining from blindly liquidating any of your assets to meet your monthly expenses. Here, it becomes vital that you consult a financial advisor who will go through your portfolio and will decide and recommend you the right investments that may be good for liquidating and utilizing for your needs.
So always consult an advisor and be prepared to face this winter that could possibly bring turbulence over your financial stability.
(The author is a Founder at Fintoo)
Disclaimer: The views expressed above are personal opinions of the author. Please consult an expert before making any decision based on the insights provided above)