After the great boom in the post-Covid period, for the better part of three-four years, many industries flourished, salaries rose sharply and jobs were available aplenty.
However, over the past year and especially in recent quarters, the news of layoffs, especially in the IT/technology sector have come to haunt many employees.
Social media is abuzz with those who spent decades in some companies being given the pink slip and asked to leave immediately.
The advent of AI and its impact in terms of job losses across industries appears a reality in the coming times.
While we cannot comment on the job market, it is important to be prepared financially should your job be in the firing line.
Emergency funds are critical. Having 6-12 months’ worth of expenses becomes a necessity for those in the middle part of their career. Ideally, they should include your monthly expenses, SIP investments (optional), term and health insurance premiums, medicine costs, children’s school/college fees while calculating your emergency fund requirements.
Navigating contingencies without job
All these aspects hold when you still have time to build an emergency fund of sufficient size.
But what if you are caught unawares and your company suddenly goes on a spree of letting people go?
This situation becomes quite challenging, especially if you are a mid-career professional in your late 30s or early 40s with dependents (home-maker spouse, children, parents) and loans (car, home etc). You may still have made periodic investments, but may not have earmarked substantial sums as contingency corpus separately.
There are two levels of actions that you would need to execute – for creating a corpus and to ease cash-flows.
When your company conveys the decision to lay you off, you must first approach the human resources department to see if you can get a reasonably generous settlement. Perhaps, you could negotiate and make a case for four months’ salary or higher as severance package, especially if the retrenchment has nothing to do with work performance, but is more a larger company/economy/industry dynamics-driven decision.
If you manage to get a good deal as indicated above, it gives you considerable space to manoeuvre your other savings or investments. But you will still need another four-eight months’ expenses depending on your settlement amount.
The next step is to bolster your emergency corpus with your existing investments.
Given that markets are nearing earlier highs (at least at the Sensex/Nifty index levels), you can revisit your asset allocation and reduce any excessive skew towards equities by taking some profits off the table by selling shares/mutual funds.
Start by selling the worst performing equity schemes (mutual funds) – those that haven’t kept up with the markets/peers for four-six quarters and figure in the lower quartile of returns. You can take the help of your distributor or financial advisor to ensure you take the right calls.
Then there are ULIPs (unit-linked insurance plans). Till Finance Bill 2021 was introduced, ULIPs enjoyed tax-free status and an arbitrage over mutual funds. We always maintain that you must keep investments and insurance separate, even if some ULIPs have done well over the years. Even the tax arbitrage does not exist for ULIPs beyond the annual premium threshold of ₹2.5 lakh.
If you went by the tax advantage pitch for ULIPs pre-Covid, you could consider exiting if the five-year lock-in is over. Of course, ensure that the fund value is higher than the total premiums paid over the years. Then there are low-return and low-cover products — money back and endowment policies. The tax benefits on these insurance products, too, have been removed beyond an annual premium threshold of ₹5 lakh. If you invested in these policies at the behest of your insurance agent, check the surrender value (what you would get if you decided to stop paying premiums and redeem proceeds).
In case the surrender value is 70-80 per cent or more, cut your losses and get back your money rather than persisting till maturity.
Term and medical insurance policies are critical. You will need to have them at all times, more so during emergency periods. We have even indicated earlier that your emergency corpus calculation must include term and health insurance premiums.
Then there is the cash flow improvement angle. If you have a home loan or any other loan, check if your lender (bank/NBFC) has passed on RBI’s recent rate cuts. Negotiate hard for rate reduction on your loans.
You can ask for reduction in EMI, which will lead to loan tenor extension. While under normal circumstances it is ideal to pay off loans early, during times of job uncertainty it is better to take this option as it will improve your savings. But make bullet payments or step-up EMI instalments once you return to the workforce.
In the case of your children’s school fees, pay in instalments for each term/trimester and not as a lumpsum in one go just because a small discount is on offer.
All these steps will reduce cash crunch and elongate your working capital cycle.
Use credit cards strictly only for utility spends and never for discretionary spends. A credit card gives you a 45-day window to repay the dues. Budget smartly and spend responsibly. Repay the entire card due amount in full promptly in 43-44 days.
Opportunity costs: Getting over FOMO
Usually, contingency funds are expected to be parked in savings accounts of banks, fixed deposits with sweep-in facilities, liquid or money market funds.
While saving 9-12 months’ expenses as emergency funds, there may be a perception about losing out on potential returns from not parking these sums in better market-linked instruments such as mutual funds, shares etc.
It is important to note here an emergency fund is meant to be a back-up for untoward contingencies and not as a corpus for optimising returns.
However, you can bucket your emergency fund for shorter periods of time.
So, you can keep two months’ expenses in traditional savings accounts.
Another two-three months’ worth of corpus can be parked in money market and liquid funds, which can give 6-7 per cent returns in the normal course.
The balance two-three months’ amount can be parked in conservative hybrid funds, which are known to give around 10 per cent on a rolling one-year basis over the past decade.
When you exhaust six months’ emergency funds, you can opt for systematic withdrawal plans (SWPs) from conservative hybrid funds.
You will thus have some (limited) exposure to markets and generate above-average returns even while sticking to the safe emergency funds mandate.