Despite all your savings and financial planning, a job loss or a major pay cut can seriously impact your finances. Here are 5 useful tips that will help you manage this situation with minimum stress:
1. Reduce your monthly spending
If you are a city dweller and have spent the last three months in lockdown, you have probably observed that basic living expenses in any city are not exceedingly high. It’s always the extra frills and expenses – like dining out, credit card shopping, and travel – that takes a major chunk of our earnings.
First, determine how much money you are spending on necessary itemslike house rent, groceries, utilities, or any loan payments,and on other items like restaurant eating, shopping, and credit card purchases. Next, fix a monthly budget for basic expenses and try to exclude all other optional expenses from your monthly activity. If not complete exclusion, consider cheaper avenues of eating out and shopping – where you can save money without compromising much on quality.
2. Do not take any new loans
Facing a cash crunch? You can feel tempted to take up a new loan, especially due to the abundance of Fintech platforms these days. For now,keep away from them. If you are already servicing an existing loan, keep aside a fixed budget for EMI payments.
You can also speak to your loan service provider and try to negotiate a lower interest rate or a longer loan tenure that will help you reduce your monthly outgoing. Alternatively, you can opt for the 3-month moratorium that is being currently offered by banks – only if it serves your needs.
Finally, if you are still falling short of cash, it’s advisable to borrow small amounts from your family or friends,instead of taking a personal loan at higher interests.
3. Avoid any major purchases for now
This is not the time to buy a new house, car, or that high-resolution television,even if you have been planning for it for some time now. Defer all your major purchases until you have some regular source of income.
Even if you have a substantial retirement or provident fund to dip into, do not use them for any expensive purchases or a family vacation. If you already have a high credit card outstanding due to previous purchases, it’s a good time to settle the dues – so that you save on the additional interest payments.
4. Build an emergency fund
After tracking your monthly expenses and outgoings, do you still have some money to spare? If yes, then this is the time to start an emergency fund by investing it into liquidity options with high returns. An emergency fund acts as a short-term fund that can help you in the future when you face an immediate cash crunch.
Here are some forms of emergency funds that can help you earn extra cash from your savings.
When is the right time to start an emergency fund? As soon as there is a likelihood of you either losing your job or getting a pay cut. The earlier, the better!
5. Look for other sources of income
Finding a new job that suits your skill and experience may take time during the current economic downturn,when most employers have cut down on new hiring. For the time being, you can take up any freelance or part-time work in your line of work,so that you have some source of income instead of zero income.
Freelance or the gig economy is currently on the rise in developing countries like India and Brazil,as depicted in the following chart,thus offering plenty of freelancing opportunities to skilled workers.
Apart from generating a monthly income, freelancing can help you develop new skills and contacts – that will be useful in the future – and also keep you positive-minded during the current tough phase.
Losing your job or getting a pay cut may feel very humiliating but it’s not the end of the world. Proper management of your personal finances, as outlined in this article, can help you sail through this downturn and emerge stronger at the end. At the same time, you know your financial planning needs the best, hence follow only those outlined tips that will work for you.