We have been through 60+ days of lockdown and life has changed much more than we had ever imagined. Some of us have pulled off the last two months with no income. Many of us have struggled and a few of us are still figuring out what comes next and are unsure of how to deal with large expenses.
For all those who are lost and worried about the uncertainties the future has in store, you are not alone. Take comfort in the fact that the human race is the most adaptive species on earth and there is nothing we can’t overcome. All we have to do is analyze what went wrong and learn from it. Uncertainties might be what makes life worth living? Even if they don’t, it’s not like we have an option to be free of uncertainty.
What I do know is that many of life’s uncertainties can be overcome with smarter planning. Smart people learn from their own mistakes while smarter ones learn from the mistakes of others.
I woke up to a long weekend this morning with some thoughts about the last 60 days and what they have taught me. My first thoughts were, of course, about finances; how the last two months have been and the financial lessons they have taught me. Some of those thoughts have really changed my perspective and, hence, worth sharing.
1) Future income isn’t guaranteed
Cliches like ‘don’t take anything for granted’ exist for a reason. The lockdown has impacted people across the spectrum, with many seeing a partial/full loss of income. Never take your income for granted; there is no guarantee that you will continue to earn as much as you are earning today. Be prepared for fluctuations in your income and plan accordingly.
2) Build a risk and contingency fund
Risk and contingency mean more than just medical emergencies; work towards saving up a large corpus of funds that will help you maintain your current lifestyle for at least 6-12 months and cover your EMI and other bill payments. Bad times are temporary but the impact they can leave on your credit score and finances, in general, can be long-term. Your best days should empower you to thrive during your worst ones.
3) Be aware and cautious about borrowing
People are a sum total of their wishes and dreams. Fulfilling some of them is how we reward ourselves and it’s what keeps us motivated during the hard times. It’s okay to borrow to fulfil your aspirations, but ensure that you have a plan on how to repay your debts and always prioritise those repayments. When taking a loan, compare your short term happiness with a long term financial commitment. Also, your debts should total below a fixed percentage of your income so that, even if you see a fluctuation in your income, you can still continue to pay off your debts.
4) Make sure you have financial protection planned
If given an option between investing in insurance and buying a twelfth pair of branded shoes/upgrading your phone, unfortunately, most of us would choose the latter because, as a society, we prefer instant gratification. Our attitude towards bad times is ‘let’s cross that bridge when we get to it’.
During the past 60 days, all our fancy footwear and clothes were locked up but what could have helped us would have been financial protection, like insurance. Many countries across the globe have a job loss insurance product (albeit with a mere 10% of market penetration since people didn’t think of it as useful before now). It’s time to prioritise these essentials. Insurance, be it life or medical, is no more an option but a must. Take the help of a qualified financial consultant and explore all options available to stay protected from unforeseen economic conditions.
5) Manage life with fewer expenses
We all spend a huge part of our paychecks on things that are absolutely unnecessary. Think of your last 10 big purchases and see how many of them are as valuable as they were the day you got them. A lot of us might have an unused, dusty cycle, a treadmill we hang our clothes on, or locked in appliances/utensils. Many of our purchases are driven by impulse rather than need. Let’s streamline our expenses and spend wisely!
6) Save at least 30% of your salary
This is the ideal amount to save (take a look at why this is the magic number you must save) since your income has the capacity to save exponentially more than you think. Get rid of your excuses and just start doing it. Put aside at least 30% of your income, but if that’s an intimidating amount, start small and work your way up to it. Let your savings make more money for you. For me, this is the best financial habit and the best-kept secret for several millionaires.
7) Market fluctuations are an unchanging truth
My reason for not investing was that I wouldn’t get the returns I wanted from investing in an FD and I wouldn’t get the stability I wanted from investing in equities. Today, I recognize it for the excuse it was.
Yes, market fluctuations will always be there, but that’s where understanding and learning about investments will help you. It’s never a one-way trip to profits; you might incur losses too but you can invest in instruments that help you reduce losses. Refer to our Beginner’s guide to investment to know more about some of the instruments you can consider investing in.
It’s been a tough time for all of us, but, to reiterate, smart people learn from their own mistakes while smarter ones learn from the mistakes of others. Leave the past behind you, learn from it and evolve. After all, the darkest nights produce the brightest stars. Start investing in ‘You v.2.0’, literally!