Be Prepared to Handle Future Shocks

As the second World War drew to a close, Winston Churchill, then Prime Minister of the United Kingdom, proclaimed that we should “never let a good crisis go to waste.”

The trauma of the Covid-19 pandemic, particularly the second wave, has left an indelible mark on the collective psyche of India. Millions of Indians have suffered from the untimely loss of loved ones. Millions more have suffered from the shuttering of the economy, be it loss of pay, loss of job, or a big dent in revenues for the business owners.

Although we’re not out of the woods yet, states are now reopening, and the worst does seem to be in our rear-view mirror.

At this time, I think it is useful to reflect on what the covid crisis has taught us from a financial perspective and ask how we can be better able to manage in the future. While the nature of every crisis will likely be different, we should expect that at some point we will be revisited by challenging times.

In my mind the most striking aspect of this crisis was how quickly it struck, catching us off-guard despite being spectators to the same crisis’s impact abroad. There was no time to get our houses in order, if you weren’t well resourced, you were in trouble. The takeaway is straightforward: to better withstand future shocks, we must be prepared.

Below I will set out some of the things one can do to build capacity to manage future shocks. The list is by no means exhaustive, more useful is the framework which I apply. In harder times, when expenses inevitably arise, you need to have liquidity and contingent funds available. 

Liquidity

Often described as ‘saving for a rainy day’ this recommends building a war chest of funds to protect against a loss of income or an increase in expenses that may arise when trouble strikes. 

Set aside some portion of your income each month towards this end. Importantly you should place your money into low-risk assets which are liquid; they can be converted to cash easily. Examples include FDs, RDs, and money market funds.

Don’t use stocks or mutual funds since you’ll be taking a market risk, and these may fall in value at the time you need them most. Similarly, don’t use real-estate for this purpose; you may not be able to sell in your time of need.

Contingent Funding

Many families struggled with the medical costs that arose from covid treatment or loss of income as a result of the lockdown. In these situations, you will need another source of funds to help you meet your expenses.

The starting point is insurance. These policies will give you a pay-out in the event of specific eventualities for which you’ve bought the cover.

Ensure you have adequate health insurance coverage for yourself and your family. Healthcare costs can rise very quickly, so get the best cover you can afford. 

Purchase a life insurance policy to protect against the loss of income of the main income earner in your household in the event they meet a premature demise.

You can also look at insurance products to cover your existing home loan or EMI payments so that you can continue to meet your obligations during a crisis. While the RBI allowed lenders to offer a moratorium during covid, this may not always be the case.

On a related note, you should work to build your credit score today; lenders become more conservative in hard times. If you have a good credit score, you’ll nearly always have access to funds.

Lastly, covid has also taught us that life is short. We can’t only be thinking about the future, there is a day that needs to be lived today. If there’s something that you’ve been wanting (and can afford it), then why not treat yourself? Financial advice doesn’t only need to be about frugality, it’s also here to give you space to live a little!

The author is CEO and Co-founder, NIRA

 DISCLAIMER: Views expressed are the author's own, and Outlook Money does not necessarily subscribe to them. Outlook Money shall not be responsible for any damage caused to any person/organisation directly or indirectly.