3 rules to remember as you battle a cash crunch

A recent survey by BusinessLine Portfolio   revealed that, with Covid decimating personal savings, people resorted to all possible means to bridge the financial shortfall — taking loans, surrendering insurance policies, dipping into PF money or breaking investment in stocks, mutual funds and deposits. Of course, doing whatever it takes to tide over a crisis makes sense; but there can be a method to this, so that the long-term impact on your finances is minimal.

Here are three principles you can follow on a rainy day.

#1 Use only your satellite portfolio

A striking fact noticed is the lack of delineation between goal-based savings and other savings. For instance, many invest in mutual fund SIPs without any particular time frame or goal in mind. When they have any requirement — be it an emergency, a lifestyle need or a home loan down payment — they sell out or at least book partial profits.

Similarly, many don’t use options such as PPF for long-term savings. They either invest very little (₹500 a year is the minimum investment for PPF) or ignore it totally and instead sign up for traditional insurance plans with high premium outgo, to exhaust the 80C limit. Yes, selling mutual fund investments or surrendering insurance policies can help you tide over a short-term crisis; But, what next? The withdrawal to meet a short-term crunch could compromise the amount needed for more important needs such your child’s higher education, which may be coming up soon.

Similarly, mixing up insurance with investment by signing up for traditional plans, and also surrendering it midway, deceives you in three ways. It robs you of the funds you could have invested in risk-free, tax-exempt instruments such as the PPF for long-term goals. Secondly, it leaves you with lower or no life insurance cover. Three, it raises the premium outgo if you want to opt for a new policy now, as your higher age as well as possibilities of other new risks may influence the underwriting. Hence, it is always essential to have a core portfolio of savings in equities and fixed income (in a proportion commensurate with your risk appetite) for important lifetime goals, such as retirement, child’s higher education or a home buy — and not touch it for any other need.

To meet intermediary needs for emergencies or to make up for pay cuts or temporary job loss, you can set up a satellite portfolio. This must comprise easy-to-access instruments such as fixed, flexi, recurring deposits and other bonds as well as overnight and liquid mutual funds. A portion of your mutual fund and direct stock investments, outside of your goal-based savings, can be earmarked for satellite needs too. Life insurance should be separated from all this.

#2 Leave the PF alone

An extension of the first rule is to not touch your PF corpus just to tide over temporary cash flow troubles. Data available publicly shows that from April 1, 2020, until May 12, 2021, about 72 lakh Employee Provident Fund (EPF) subscribers have availed the special Covid advance announced last year, withdrawing a total of ₹18,500 crore.

Yes, the withdrawal process is easy and entirely doable online in a matter of a few minutes if your UAN is linked with your Aadhaar, bank account details and mobile number; And, the claims are settled in three days. But this should not tempt you.

For many of us, EPF is not the only savings that we may have. Hence, touching your retirement kitty is a strict no-no. For one, there are very few options for long-term savings that provide tax benefits, are risk-free and also give assured returns.The Covid advance from the EPF is non-refundable, implying that your kitty is dented to the extent you withdraw.

Similarly, don’t dip into your PPF account too even though it allows partial withdrawal — you are allowed to pull out certain sums after expiry of five years from the end of the year in which the account was opened, without end-use restrictions.

#3 Say ‘No’ to loans

Our survey showed that about 11.5 per cent of the 408 respondents resorted to borrowings to meet their expenses since the Covid outbreak, be it to pay for hospitalisation or to make up for a job loss or a pay cut. However, when there are pay cuts and one-time payments such as bonuses/incentives have become hard to come by, the last thing you should do is take on more liabilities. Interest rates for personal loans run well into the teens for many banks. And one more EMI when you may already be having a home/car/education loan, will crunch your monthly disposable income. This will end up curtailing your savings for the future as you may ultimately skip RDs or SIPs to feed the EMI.

About 19 per cent of the survey respondents used credit cards to meet heightened expenses due to the crisis. Some have even signed up for new cards and/or increased limits, thanks to its handiness. However, remember that your credit score could be impacted if you sign up for multiple cards and also use the limits to the maximum. This will have a bearing on your eligibility for future loans as well as the interest rate at which you can borrow. More immediately, an inability to repay credit card dues on time always carries the risk of snowballing interest payments and, worse, landing you in a debt trap. .

Rather than borrow against FDs at a rate higher than the return you get, pre-close the FD. Don’t resort to loans against securities as will get only 50-60 per cent of the value as loan and will also have to make up for the shortfall if there is a sharp fall in value.

COMMENT NOW