Taking salary cuts? Here are some survival tips in these difficult times

June 30, 2020 6:15 AM

If you don’t have an emergency fund, consider liquidating some of your investments, starting with the riskier ones

Basic principles of financial planning insist on creating an emergency or contingency fund which is equal to six months of family expenses.Basic principles of financial planning insist on creating an emergency or contingency fund which is equal to six months of family expenses.

By P Saravanan & Swechha Chada

The economic impact of the Covid-19 outbreak is already being felt as the economy drastically loses momentum. Many companies are trying to reduce their operational expenses via salary cuts to employees, compulsory leave, lay-offs, etc. Although everyone is facing financial challenges, the severe economic slowdown has hit millennials particularly hard. Let us discuss here a few financial survival tips that can help salaried class, especially millennials.

Which segment is affected?
Though industries across the spectrum are affected, segments such as travel, tourism, leisure and media are worst sufferers. With the same level of liabilities and cash outgo towards loans, living with reduced income due to pay cuts is certainly difficult. So, the big question is survival. Basic principles of financial planning insist on creating an emergency or contingency fund which is equal to six months of family expenses. Those who have built such an emergency fund in place are relatively better off in the current challenging times.

Curtail discretionary expenses
It is time to do a budgeting exercise and divide expenses into discretionary and non-discretionary (essential) categories. One should completely curtail discretionary spending such as on alcohol and tobacco and temporarily stop expensive hobbies. Prioritise non-discretionary expenses such as rent, groceries, utility bills, mortgage, credit card, car loans, insurance payments, etc. Though there is a moratorium on loans, it is advisable to continue paying your EMIs in order to avoid additional interest burden. Only those who have suffered a huge pay cut thus making payment towards loan instalment very difficult should opt for moratorium facility. While doing such an exercise, it is important to consider your family’s needs.

No emergency fund?
Not everyone follows the principles of financial planning and builds an emergency fund. In such a scenario, consider liquidating some of your investments starting with some risk investments such as shares, equity mutual funds, fixed deposits, debt funds, etc. Do not sell all the assets at one go, set up a systematic withdrawal plan to get a regular income.

Avoid taking a personal or credit card loan at any costs. Better seek help from your family and close circle of friends. The way out is to have a relook at your expenses and lead a frugal life, at least for the time being.

Managing loans
For those who have availed loans and have the burden of paying monthly instalments with reduced income, the best option is to get your loan re-priced and if possible replace the existing loan with cheaper ones. For instance, if you have a personal loan consider taking a gold loan which is cheaper.
Lower income owing to pay cuts and uncertainty about the future can make your previous budget ineffective and thus it is essential to completely redo your budget in the lines as discussed above. While current times are tough for millennials, remember that this is a temporary situation and the economy will bounce back.

P Saravanan is a professor of finance and accounting at IIM Tiruchirappalli. Swechha Chada is an FPM scholar in IIM Tiruchirappalli

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