Covid-19: Tweaking your household budget to tide over the lockdown

Make every rupee count, save every penny possible, use every rupee wisely and know this too shall pass

It's time we stopped focusing on fear and anxiety around Covid-19 and started answering practical questions about all the changes it has brought about in our daily lives. "We all will need to live through the isolation and months of working from home. And, perhaps sooner or later work on lower salaries or even with a no-paycheck scenario. Thus everyone needs to bring about a change in their financial strategies to survive the new environment," says Mumbai-based Certified Financial Planner Pankaj Mathpal. "This means close monitoring your cash flows (money coming in and going out), and changing them in according to the situation." 

In short, if you already have a household monthly budget, you would need to tweak it. If not, then it's about time you made one.

Best of times and worst of times: The first step is to assess your current financial situation. Know your income, expenses, assets, liabilities, insurance cover and such like. Chartered Accountant Ashok Shah, founding partner, NA Shah Associates, says, "When you are reassessing your budget, you need to think of various scenarios -- worst-case, normal and best-case -- and the response you will have to them, in case they happen." 

A worst-case scenario could be a job loss, or a considerable pay cut of 20-30 per cent. A normal scenario is one in  which things typically don't change much financially or change only a little. A best-case scenario is one in which your income stays protected but the lockdown and work-from-home have put more money in your pocket. Shah says, "Predict your cash flow in every scenario. Check how many months you can survive in each. If there is a sickness next month, you can't afford to address it after three years. You will have to spend for that. Planning a disposal strategy for assets as the next step in case your scenario changes will prevent a fire sale." 

In short, it's time to build a few mental models, reassess, reallocate expenditure, reassess realisation of assets and contingencies.

Expenses: Irrespective of whichever scenario you are in, this is the time to reduce your costs even further. Many expenses have automatically been curtailed, like going out for movies, eating out and shopping for clothes, thanks to the lockdown. Mathpal says, "Ensure you keep variable expenses low, even when you are at home. People who already have Amazon Prime, are subscribing for Netflix, buying Youtube movies. This is an added expense you are incurring sitting at home." Remember, expenses are of two types, fixed and variable. The variable category can be divided into two parts - the necessary and the voluntary. Necessary variable expenses are those you cannot live without, such as groceries, electricity bill, mobile bills and other utilities in general. Entertainment cost, even if online, is something you can cut. You have several free resources out there today.

Liquidity: Once you've taken the above step, the next is to see how much money you have in hand. Mathpal says, "The most important thing you need to have in these uncertain times is liquidity." Ideally, if you have six months of an emergency fund, good for you. Those who don't have one built should immediately park the transport cost they have saved towards this amount. It won't be much, but it's a start. Remember, this is perhaps the most important thing you can do at this point of time." 

Gaurav Rastogi, Chief Executive, Kuvera.in says, "If you don't have emergency funds in place, then divert whatever amount you can save going forward into liquid funds." The point is to have enough in emergency funds to stretch till the lull lasts, which is about six months minimum as per the experts.

Loans: Banks are giving a three-month EMI deferment on many loans. If you can afford it, it's best to avoid a moratorium. But, if you have no money, you have no option, you will have to take it. Another way to save money is to prune interest cost. Let's assume you took a personal loan last November at a higher rate, and now personal loan rates have reduced. You can switch to a lender offering a cheaper loan. Of course, you should ensure that savings are substantial and the new loan doesn't have a huge processing fee.

Investments: If you have had a salary cut, you perhaps cannot continue to invest the same amount anymore. But that doesn't mean you need to stop investing, especially if you have your emergency fund in place. Rastogi says, "When you have a lockdown like this, assuming that it gets resolved in the next three to six months, for many people expenses would have already gone down by 30-40 per cent month-on-month. On aggregate, we don't expect salaries to go down by 10-15 per cent in the next six months for most. Globally all economists are saying that there will be huge private savings surplus in the next six months, including India." This means that your expenses could have gone down more than your income. Rastogi says, "When it comes to budgeting, you need to assess the probability of your income going down in the next six months. If your salary isn't cut and your expenses have come down, then you have surplus savings which you should invest. If you don't have the stomach for equities, go for low-risk investments."

On risk mitigation Mathpal says, "Even if your employer provides medical insurance, buy personal insurance for yourself and family asap. Job loss is a possibility for many in the current economy."

The truth is you will have to work on making your new budget; these are just some guidelines. Make every rupee count, save every penny possible, use it wisely on medical insurance instead of Netflix. This too shall pass. Shah says, "Live short today so that you can survive long later."

10 steps in making a budget

Step 1: Make three mental models (Worst, Normal and Best Case Scenario)

Step 2: Estimate your potential new income. 

Step 3: Understand your current fixed and variable expenses 

Step 4: Analyse and narrow areas to trim variable expenses

Step 5: Give every Rupee a plan. 

Step 6: If no Emergency Fund, start building one with liquid funds /savings account.

Step 7: Switch loans to a cheaper rate

Step 8: Buy/Top up personal medical insurance for self and family

Step 9: If emergency fund is in place, continue investments whatever amount possible

Step 10: Overwhelmed? Seek professional advice from Certified Financial Planners.