“Eternity is not something that begins after you’re dead. It is going on all the time. We’re in it now.”
– Charlotte Gilman Perkins
This quote was written about a century ago. And it feels relevant. Because as we’ve seen a lot of new phases personally and as a species as a general in past few months.
Anyway, why we find this particular quote so relevant is because it talks about the perspective of time. Over the past few months, the entire global economy has seen some major movements in all sorts of directions. And while this all is going on, it seems like this is surreal and omnipresent at the same time. This is because in many ways, it is unusual.
See, if you have been following economics blogs, there have been major comparisons drawn to economic impact of COVID-19. People compared it to The Economic Crisis of 2008 to find a scale of reference, because of the resultant large-scale unemployment. There were even comparisons to World War 2, because like war, there were people on the front line with increasing demand for their services (soldier, doctors & nurses), there is large scale investment in scientific research (Nuclear Armament, vaccine & cure). But the point is, all of this because there is no single frame of reference.
But that is not what we’re about to do. What we shall look into, is how all of this affects that teeny, tiny hole in your wallet, and what you can do make sure your personal financial goals remain intact. So strap in, we’re going on an adventure!
What was the Situation Before CoVID-19?
Refresh the important financial basics and rewind what was the situation before this pandemic. Think of this principle in Accounting, called the Principle of Going Concern, which basically means that think of a business to be functional in perpetuity. That is exactly how we thought of our finances.
Consumption was at all time highs. But at the same time, debt also was also at all time highs. You see, the basic reason for debt is to get funds to pay for current expenditure because there is a deficit in current assets. And debt market was booming. Getting a loan was as easy as downloading a personal loan app on your mobile, and the paper work, minimalist.
Think about it! Think back to your eating habits before COVID-19. Or about how iPhones broke the class barrier in last five years.
How COVID-19 Impacted Personal Finance?
You see, the entire purpose of a lock-down like we just went through, is to reduce consumption. The idea was to reduce interaction, but the way a state does that is by reducing marketplaces, acting as a negative incentive to go out and do stuff.
This, in turn, acts as a negative incentive for businesses and organization alike, because they suddenly experience a furlough of demand on drastic levels. But, they have another incentive, Survival. Because the only choice they seem to have is to somehow withstand the rising tide.
Now because there is a drastic decrease in revenue, the only thing they can do is scale down and somehow continue their activity. In this scenario, the way to earn profits is by reduction of costs. But expenses like fixed revenue expenditures and capital expenditures cannot be reduced, because either they have already been made or simply have to be made.
Businesses, however, can scale down in terms of variable expenses like labor costs. Enter large scale lay-offs and unemployment. The entire idea is to somehow continue the activity, despite of absence of demand, even if there is loss. For example, Maruti Suzuki did not sell a single car in the month of April, 2020, throughout India.
You see, say a system like Socialism was as prevalent as much as; or instead of Capitalism. Then, the State would be spread too thin in trying to collaborate efforts, in terms of both curing the cause and surviving the economic impact. You might say it may survive, and even thrive. But so might capitalism, and here people have the economic incentive to get out alive as soon as possible as well.
Getting away here from the point here. This entire process is oversimplified, but you get the idea. Because you’re buying less stuff, the economy in turn gives you the ability to buy even lesser stuff. This reduces the flow of money, whose major impact is seen on the equities and debt market.
But before this situation, there was a steady rise in consumption Now even though income has reduced because jobs have reduced, there is still those debt payments that have to be made. This, perhaps, was one of the reasons for both Loan Moratorium and Stimulus Packages, provided by the governments around the globe. All of this resulted in a major consumer behavior change, people focused on needs more than wants during the period of the lock down. Needs like food over wants like an extra car!
What can You Do to Manage Your Finances Post COVID?
Now, how can you manage your finances? A tricky question indeed!
- Forget the thumb rules: Of course, to some extent for now!
There was this prevalent thumb rule that you should have your contingency fund for at least three months. Experts at Bloomberg advise it should at least be for twelve months now. Again, the idea is to withstand any such scenarios, or the second and subsequent waves.
- 2. Re-evaluate the Risk Factor:
The second thing you can do is re-evaluate your risk-taking parameters. This helps in two things. The first, if rationally, you narrow down the amount of market risk that can have a major impact on your portfolio as a whole. The second, this would also help you decide the kind of asset class you want to invest in, or even fixed income securities.
For example, Fixed Deposits, generally regarded as a less return option, is one of the few asset classes that has out-performed benchmark indexes like NSE. Choose an asset class that suits you as an individual and your risk-taking abilities according to your financial goals.
- Learn & Analyze
There is a subset to this, do your homework and learn in-depth on different types of stocks or any other asset class along with staying away from false information. There have been, time and again, widespread questions about mid-cap stocks as an investment, how their volatility has caused substantial losses and the dilemma is whether to book the losses and move on.
The thing is, mid-cap stocks as an asset class have always been very volatile, because of the sheer nature of the asset class. What this basically means that it has a chance of both, better returns than average large cap returns and detrimental returns.
- Manage Your Personal Debt:
The third is managing your personal debt. While stuff like buying homes do have a certain level of emotional attachment to it, its time value compared to rent during the same time should be taken into account. Also, debt payments take up a majority of personal income, which could serve as a blockade to creation of personal contingency fund.
The Bottom Line
These are unprecedented times, so you might find a ton of advice of what can be and what you should do. But another side to notice is productive creativity can be left unchecked. Basically, we are trying to tell you there is no ‘one ring to rule them all’, so try a bunch of them, see what fits!