Financial Lessons from 2020

The year 2020 caught everyone off the guard, be it nations, policy makers, corporates, small businesses and individuals. As covid-19 spread through the length and breadth of the world which ensued lockdowns in most economies resulting in consequential slowdown in economic activity.

In India too, nationwide lockdowns were announced, which stalled economic activity. Government and RBI ensured corrective fiscal and monetary actions to get the economy back on track. Uncertainty and Volatility remained the two sentiments which characterized the entire year. While government and RBI resorted to some unconventional tools, businesses and individual depending on their ability to cope with the uncertainty, sustained or found basic survival also difficult.

Thus as we close this year we look at the financial lessons that the year has significantly brought to forefront.

  • Do not save what is left after spending, but spend what is left after saving:
    According to the popular 50/30/20 rule, you should reserve 50% of your budget for essentials like rent and food, 30% for discretionary spending, and at least 20% for savings. Higher an individual’s earnings, higher can be the associated saving percentage as then essentials may not take up 50% of your salary. While these are ballpark numbers, higher the savings, easier it gets to sail through uncertain times like the pandemic.
  • Most important key to successful investing can be summed up in two words: Asset Allocation:
    The importance of having a good asset allocation with a strategic and tactical allocation gained much prominence. This year began with equity and debt witnessing significant stress, while Gold and Pharmaceutical sector saw an uptick. However, by end of the year equity has bounced back. Thus a strategic allocation as per individual’s requirement along with tactical allocation as per prevailing economic conditions is recommended as per investors goals and income levels. Ensuring some allocation to liquid assets is also imperative, to have funds handy when need arises.
  • Making a robust Financial Plan and periodic review of the plan :
    Planning is bringing the future into the present so that you can do something about it now: A bespoke financial plan as per one’s specific requirements and future goals must be made and reviewed periodically to ensure security of future. Allocation should be made to a contingency fund, to meet unforeseen circumstances.
  • Beware of excessive debt, a small leak will sink your ship:
    Manage your personal debt level and ensure your debt servicing capacity. The income disruptions caused by the pandemic adversely impacted the debt servicing capacity of a large section of individual borrowers, leading them to opt for the moratorium on loans and credit cards announced by the RBI. As per the Financial Stability Report released by the RBI in July 2020, about 50 percent of the individual borrowers had availed the loan moratorium as on April 30, 2020. Additionally, compare your cost of capital to expected post tax return on capital. Any leverage where the cost of capital is greater than the post-tax return on capital should be pruned down.
  • Build a Contingency / exigency fund for the rainy day:
    The contingency fund is required to meet unforeseen expenses. As financial exigencies come unannounced having certain portion allocated to assets which can be easily liquidated is imperative.
  • Plan your protection net - Ensure adequate insurance cover:
    The current pandemic has highlighted the need for adequate health cover for you and your family. In case of inadequate cover, high hospitalization costs like in the case of pandemic can wipe out significant corpus of your wealth. Working individuals covered under their employer-provided group health policies should also buy separate health policies, as such group health covers are mostly inadequate to meet the rising healthcare cost. Moreover, such policies also lapse as soon as you change your job.
    One also needs to have adequate term insurance (upto 10-12 times your annual income), to support your dependents in unfortunate event of your untimely demise.
  • Invest and keep compounding :
    Building wealth is a marathon, not a sprint – discipline is the key ingredient: Continue investing through SIP and Lump sum routes. As Warren Buffet quotes “Be fearful when others are greedy and greedy when others are fearful. Triggered by Covid-19 and allied fears, all indices corrected severely in Mar 20. Many investors exhibiting loss aversion, fearful of this breathtaking decline, sold their stocks into the market weakness. It is in times like these that you get the best bargains to build your portfolio. Also continuing your disciplined approach to investment is critical to build long term wealth.
  • Let’s not forget to consume:
    Because “all work and no play makes Jack a dull boy” – Indulge on all good things because you deserve it.

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