Everyone is talking about the economic slowdown. Has it affected you? Here are some tips on how you can last longer in bad times
The frequency of slowdown events has gone up. If earlier slowdowns used to visit once in every five to six years or even in a decade, now it could happen every two years. Add to that several policy disruptions and the unintended consequences of certain policy moves, then the slowdown is not merely a cyclical phenomenon. Also you could see a prolonged experience of slowdown. This would result in lower corporate profits, reduction in funding and subsequently in job losses. Thanks to better lifestyle and higher inflation, everyone is running their household on a tight budget. So whenever a slowdown happens, the impact on your personal finances could be disastrous. For most people, a third of their salary goes into taxes, another third is for expenses while the remaining is the only part they can save. Now it’s imperative, you also take the slowdown as a factor into consideration when you do your financial planning. We look at a few ways to survive a slowdown that would visit you frequently during your career.
We have heard of emergency fund – which is a corpus that could help you meet expenses for 3-6 months or to meet any other unforeseen circumstance like a medical event. But that may not be enough if the slowdown persists. We suggest you to keep building a buffer by topping up your investments as that would help you live in peace whenever a slowdown is looming large. This enhances your savings kitty.
So how do you build that? Every year (well, mostly) you get a salary hike from your employer. Most of the time, you might spend the salary hike on buying consumer durables or for enhancing your lifestyle (which is called lifestyle inflation). But we suggest you don’t go overboard on spending all that precious hike you get on eating out, an expensive vacation or gadgets.
We suggest you move at least 50% of that increase in your pay to your investments. Essentially, you need to increase your investments along with every hike in your income / salary. For example, if you get a 10% hike, increase your monthly mutual fund Systematic Investment Plan (SIP) by 5%. This is the easiest way you can enhance your savings every year. This way, you will not only save more but you will also get compounding gains on the savings.
Most of us are very prompt when it comes to bill payments. But the same may not be true for savings and investments. So, it is good to automate your savings. For example, let’s say you usually put your savings into fixed deposits by the middle of the month. You might not invest the same amount every month because you might have expenses. This could lower your savings in the long run. Automating your savings and investments will help ensure that you save for your goals. You could use auto sweep-in accounts or give auto-debit instructions for your recurring or fixed deposits. When you start automating your investments, you compulsorily save every month. Saving money regularly will help rein in unwanted expenses.
Investments come at a cost. This includes shares, mutual funds, deposits and other investments. Cost of investing can lower your returns. Usually, the cost of investing is deducted from your investment amount and you invest lower amounts. Let’s suppose you invest in shares using an online demat cum trading account. You will be paying fees for the account and also for the transactions. To lower costs, you need to review your account’s plan at least once a year in terms of costs. You should choose a fee plan based on the quantity traded by you and how often you buy and sell shares. As you might know, fee is higher for small transactions while you could get a discount if you trade in shares often. In case of mutual funds, direct investing is the best option to lower costs. Since you will invest with the help of a fund house, you don’t need to pay any commission.
For some of us the most important monthly expense might be loan EMI. If you have a high interest rate loan, your EMI will be high. Now that interest rates have fallen, you could consider a loan with lower interest rate. You could also consider a longer tenure loan if you want to significantly reduce the EMI. Consider this: if you have a Rs 30 lakh loan for 15 years at 9.5%, your EMI will be Rs 31,327. If you get a loan at 8.5%, your EMI will be Rs 29,542. You save Rs 1,785 every month. If you can get that loan for 25 years, your EMI will be only about Rs 24,157. You save Rs 7,170 every month.
You might have a loan for a car or home. You might even have a personal loan. Most of the times, we pay off one loan while you continue to pay EMIs for other loans. The mistake that we often make is that when we pay off a loan we have additional surplus and we might use it for upgrading our lifestyle or for splurging on consumer durables. Instead of spending that extra surplus, you could save or invest at least a part of that money. This might be very tough to start with but you could save a good amount of money in the long run and might even have money to pay off other loans.
When we make purchases like consumer electronics or household appliances, we might have a budget for them. With hypermarkets and stores offering discounts on all these products, we might be able to buy them at prices that are well within our budget. Since you managed to save (budget – actual amount), consider depositing the excess in your savings account or you could even invest in mutual funds.
For every spend that you do, consider investing a part of the amount spent. ICICI Bank’s Chhota Savings for iWish works around this. This facility rounds off your day-to-day transactions and auto invests the amount in your respective recurring deposit. You can enable this for any deposit. You can round off the investment by Rs 50, Rs 100 or Rs 500. For example, you choose a round-off amount of Rs 50 and make a fund transfer transaction of Rs 6,020 using net banking. Your transfer will be rounded off to Rs 6,050 and this will be debited from your account. The fund transfer will be only Rs 6,020 while the Rs 30 will be invested in your deposit. This is good way to save money while you spend.
When you get windfalls like bonus, incentives and inheritance, don’t spend it all. You should make a financial plan for saving and investing the money, especially if it is a big amount. Consider including equities and mutual funds if the amount is much more than your annual salary. You could put small amounts into your deposits.
These are just some of the ways in which you can save money. Don’t forget to cut down on taxes by investing in tax-saving investments. This will also help you save money during the economic slowdown.
Subscribe & keep learning!