When we make our financial plans, we end up relying on a host of assumptions relating to our risk appetite, saving patterns and the resilience of our incomes to external shocks. But making the right assumptions about oneself needs a lot of self-awareness.

If we go far off the mark, our financial plans will miss the targets. Unexpected events like the Covid-19 crisis give you the opportunity to put these assumptions to a real-life test.

Here are four checks you may like to run on your financial planning assumptions, now that you’re forced to live through this crisis.

Your real risk profile

Most financial planning exercises start with attempts to assess your ability to handle capital losses or volatile returns in your investment journey.

Apart from gathering facts about your age, life stage, income and liabilities, risk profiler questionnaires often try to gauge behavioural aspects too. They ask questions such as these — would you buy, sell or simply hold if you have invested 75 per cent your savings in the equity market and lost 20 per cent in six months? How often would you check your portfolio in a market fall?

When answering such questions in the abstract, most investors tend to wrongly gauge their risk appetites. But the market volatility that has hit us during the Covid-19 crisis helps us get a real-life taste of what risk can do to our investment returns.

Indian investors in the past two months have lived through liquid funds, considered among the safest parking grounds for one’s money, delivering negative returns, and equity funds losing 25-30 per cent in barely two months.

How you acted during this phase is an excellent test of your true risk tolerance. If you have been anxiously checking on your equity portfolio every day, making ad-hoc sells or switches or stopping SIPs in the hope of resuming them again when things get better, you’ve probably overestimated your risk appetite. If the negative returns from liquid funds for a temporary period unnerved you, you’re probably not equipped for a market-linked fixed-income portfolio.

Go back to the risk-profiling exercise with more realistic responses and you may be able to get to your true risk tolerance.

Set allocation right

The return volatility that we’ve seen both in equities and debt in the last two months is also a good opportunity to gauge if you’ve got your asset allocation right.

Your risk profile should be the key decider of your asset allocation. If the recent equity market volatility has had your portfolio value swinging too much for comfort, that’s a clear sign that you need to reduce your equity allocations and add to debt and cash.

The recent behaviour of your portfolio would also have told you if you have invested in the wrong assets towards some of your goals. If you were relying on aggressive hybrid funds for regular income, recent capital losses should prompt you to switch to a more suitable avenue.

If your emergency money was in debt funds with credit risk, the write-downs should nudge you to turn to safer avenues. If you held equity funds for less-than-five-year goals, this is a red flag that this may not work.

The recent spell of volatility should also have told you if you have an adequate protection element in your financial plans by way of life and health insurance and an allocation to gold.

Re-assess savings potential

Estimating your living expenses and savings potential is critical to mapping out your financial goals. To do this though, advisors ask you to distinguish between needs, wants and luxuries.

But in normal times, this is easier said than done.

Is a weekend fine-dining trip with your family a want or a luxury? Can you survive without online shopping for a whole month? Your answers to these questions six months ago may have been very different from the ones you’d give today, as you’ve learnt to live on the bare essentials during this lock-down.

If your monthly expenses and credit card bills have shrunk sharply, that’s a sign that a fair bit of your monthly expenses were going towards wants and luxuries rather than absolute needs. This is, therefore, a good time to re-prioritise your financial goals. If you’ve found that you can really live on a lot less, it’s a good opportunity to bump up your monthly savings.

With no spending towards your office commute or wardrobe refreshes, your monthly expenses today may also be a good gauge of your likely spending post-retirement.

Stress-test emergency fund

Apart from putting your own finances through an agnipariksha , this lock-down is proving to be a stress test for the organisations you work with, too. If you are a salaried employee and your employer is already talking of pay-cuts and pink slips, you’ll know that you need additional buffers to your finances to tide over a crisis.

Ditto if you are self-employed and face delays and defaults in dues. While financial advisors usually recommend six-month worth of expenses to tide over income or job losses, the Covid-19 crisis tells us that most of us need a larger emergency cushion of 9-12 month expenses.

The parking ground for this money needs to be liquid and risk-free.

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