Chalking out a budget for the family during emergencies
The global pandemic and the resulting lockdowns brought out unimagined challenges for world economies. In a developing country like India, the economic impact was intense.
While the lockdowns brought smaller businesses to a grinding halt, job insecurity was heightened and pay cuts became rather normal. Those who had a roof over their head and some savings to fall back on, managed to sustain through this period. Many had to face a reality where they lost their income or worse still, lost family members. The key learning for anyone during this time has been the unpredictable nature of life and the importance of planning your finances in a way that you can handle emergencies.
But how do you create an emergency budget for your household?
When it comes to the future income, there are simply no guarantees. Businesses may shut down, jobs may be lost, unforeseen circumstances may lead to paying cuts. If sources of income reduce to a trickle or dry up, you could attempt to reduce your expenses. However, certain essential expenses cannot be reduced or eliminated. These include food, rent, electricity, school/college fees, repayment of loans and interest, commuting, medical expenses etc. It is at such a time that a ‘reserve fund’ comes in handy. To overcome any emergency or financial crisis, everyone must create a ‘contingency fund.’ Care must be taken to ensure that these arrangements can tide over the household and other expenses if there are no salary credits for at least seven to eight months.
To begin with, always have a backup plan when it comes to your profession. One cannot predict how a certain event might impact a certain industry, so it is wise to keep developing your skillset to be able to switch job profiles across different sectors. During the pandemic, a lot of small scale businesses mushroomed as a result of job losses. To stand up to the challenge, individuals who lost their jobs started up home catering, coaching classes, fashion/craft products etc. Some people even emptied a room in their home to rent it out. Some who were forced to move out of urban areas, went back to their villages to start farming. If we look at the survivor stories of this pandemic, it can be observed that additional skill sets and educational qualifications are an asset that can keep us afloat during hard times.
Those who are unable to create a strong financial security cover for themselves due to lack of adequate income must invest in a good life and a medical insurance scheme. Do not fall prey to insurance schemes that promise returns as insurance is meant to provide during difficulties. It is not a means to maximise returns.
In times of emergencies, expenses must be strictly regulated with due consideration to the likely sources of income. This is an ideal time for some honest self-appraisal. During times of financial security, we often become slaves to some unnecessary luxuries. This is a good time to quit those habits which are not part of our necessities and can help us live a healthy life. During the pandemic, many people were allowed to work from home. This helped save on commuting costs. The discounts, reward points and cash backs that were offered on online purchases helped save money to an extent. Similarly, cutting down on unnecessary expenses also led to a rise in savings. Money saved through this route must be invested in schemes that provide good returns. Investment decisions must be based on solid information and advice from a qualified financial planner. Some of these savings must be reserved for medicines and hospitalisation expenses. This is because medical emergencies can come up without warning.
If your loans are proving to be a burden during these times, contact your lending bank or institution to explore your options. However, only take the benefit of loan and EMI repayment moratoriums to a limited extent. Moratorium only extends the period of repayment, it doesn’t eliminate your debt. Deferring the repayment also affects your credit score. This will affect your eligibility for loans in the future.
Do not take loans to meet liquidity needs in times of distress. This is because there are chances of being cheated in loan transactions that are entered into without any surety of income. The rate of interest may also be steep. Instead, try to raise money by selling assets like gold, real estate and shares if possible. These assets can be created again.
Similarly, use debit cards rather than credit cards to control spending. This will ensure that expenses do not outgrow income. Also remember, credit cards levy astronomical interest rates if you fail to pay bills on time.
In short, an excellent domestic budget can be drawn up by striking a balance between income and expenses, understanding the difference between essential needs and avoidable luxuries, prioritising savings, creating a contingency fund for emergencies and ensuring that the debt burden does not grow. Always remember, good financial habits we develop during the hour of crisis will last for life.
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Rupa Rege-Nitsure
The author is an economist.