 "Living on the edge")
Abhay Kumar (name changed on request), a Mumbai-based business process outsourcing professional, is battling the fear of a job loss. Kumar says 20 colleagues were asked to go over the past three months. Each time pink slips were doled out, Kumar thought he would get one, too but has been lucky so far.
"I don't know when I will be asked to go because our firm is apparently planning to cut staffers by 40 per cent. According to that number, another 30 may be in the line of fire," he laments. Kumar's is a single income household and, hence, he's even more worried. He has a wife and one-year-old son to support.
This is not an isolated case. Given the poor business environment, pink slips have started hitting the corporate sector. Certified financial planner Suresh Sadagopan recalls someone who faced a similar situation and had come for financial advice. He earned Rs 1.5 lakh a month and had a wife and two children to support.
"We advised keeping two and a half to three months' cash in a savings bank account and the remaining three months' funds in flexi-deposit or liquid funds. Six months worth of expenses in cash or in a liquid option should be enough to provide for your family's basic requirements while giving you ample time to look for another job," says Sadagopan. For flexi deposits, you need a savings bank account and a fixed deposit with the bank. The fixed deposit is linked to the savings account. In case there are insufficient funds in the account, the gap is automatically transferred from the fixed deposit to the savings account.
Complains P V Subramanyam of subramoney.com and a financial trainer: "Most individuals do not think of planning for such unforeseen circumstances. They will run for help only once the problem has cropped up, not when there is a likelihood of it. Most do not accept that they might also face bad times." He advises starting to increase the contingency funds or liquid investments even if there is a slight chance of an extreme event. More so in times like these, when there is no cheer in the economic environment and cost rationalisation is the only option for companies. Start early. Even if your job is safe, extra funds in hand are always helpful.
Subramanyam also advises a look at your financial commitments and discretionary expenses, which can be huge, especially in youngsters. "Many youngsters are seen to have over-leveraged their portfolios by putting money in real estate as investment. They are paying 50 per cent or more (of their monthly salaries) towards a home loan. And, they have many non-essential expenses. In bad times, there is very little these guys can hope to do to save cost," he warns. And, huge investments in real estate could be illiquid, as you cannot sell a property whenever you want cash.
Typically, financial planners advise having three months worth of expenses in cash or liquid mutual funds.
Here's how you can plan for the worst in anticipation of a job loss or salary cut:
Emergency kitty
When facing a job loss or salary cut situation, first look at increasing the emergency funds at hand, either by raising your cash holding or by increasing the investments in liquid instruments - income or liquid funds. According to mutual fund rating agency, Value Research, liquid funds have returned nearly 8.50 per cent in the past year and income funds have give over seven per cent in a year.
Some even advise having a six months' emergency kitty for household expenses and another kitty for a year worth of obligatory expenses like home loan repayment or children's school fee or insurance premium and so on.
The amount of emergency funds to be accumulated depends on a few factors - your obligatory expenses, whether or not your spouse is working, how soon you can get the next job, can you take a salary cut in place of a job loss, which level you work on and so forth. The provisioning can be lowered if you have a working spouse or if you've had to take a salary cut than face a pink slip or if you're already in talks for another job.
Sadagopan says as most individuals have a good portion of their investment in debt instruments, especially bank deposits, they already have three to six months of liquid investments at hand. You only need to work on their cash holding a bit and it can be sufficient for a year.
Separate contingency funds
A contingency kitty should not take into account your debt portfolio. Investments and emergency portfolio should be kept miles apart. The investment portfolio is linked to your future goal. Disturbing it or dipping into it because you are ill-prepared for bad times might have ripple effects. An emergency kitty is purely to rely on and use in bad times. It can be rebuilt once you tide over unforeseen times.
Risk management
Financial planners says individuals fearing a loss of job should remember they will not have employer-provided health cover or personal accident cover after moving out of the company. Also, their family members, especially elderly parents, will be at risk. Hence, you need to provision for this by either saving, separate from the contingency kitty, or buying a small family floater cover. At least a personal accident cover is important if it is a single income household, to prevent any drain on the pocket, they assert.
Double income households could still look at buying a health insurance/family floater plan at the earliest. Despite this, a small kitty could do you good if there are elderly people at home.
Non-essential expenses
Make a list of the non-essential expenses you make - weekly dining, shopping for retail therapy, catching up on all movies, weekend getaways and so on. Cut or lower these.
People attach sentiments to non-essential expenses, like shopping has a feel-good factor or I have promised to take my son out after his exams and so on. You need to detach yourself from these things. Be cautious in bad times, warn financial planners.
Subramanyam complains that many feel they deserve to eat out or party or take a break from work life. There are more important expenses to look at and work on than this.
If needed, stop investment temporarily
If you have ongoing commitments towards, say, a systematic investment plan for mutual funds, you could even consider stopping these temporarily, as cash might need to be diverted to household expenses, says Sadagopan. Cutting unnecessary expenses in such times and focusing on providing for your family will be a better option.
"Expecting a job loss is like anticipating fire-fighting. Therefore, we get in to a wait and watch mode and not make any further investments, as liquidity is of utmost importance in bad times. Even existing investments need to be relooked, if need be," adds Sadagopan.
You could continue with existing investments if you are already in talks for another job and will land one in say, the next two to three months. Or, if your spouse is also earning. Discontinue your investments temporarily if you feel you might not get another job in the next one to two months.
Don't touch surpluses
In case you have some surplus, such as a bonus or investment gain, park it in your savings bank account, in case it is needed. It could be later deployed for a medical emergency when you don't have a job or for children's education-related need(s) or some last-minute expenses.
"I don't know when I will be asked to go because our firm is apparently planning to cut staffers by 40 per cent. According to that number, another 30 may be in the line of fire," he laments. Kumar's is a single income household and, hence, he's even more worried. He has a wife and one-year-old son to support.
This is not an isolated case. Given the poor business environment, pink slips have started hitting the corporate sector. Certified financial planner Suresh Sadagopan recalls someone who faced a similar situation and had come for financial advice. He earned Rs 1.5 lakh a month and had a wife and two children to support.
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Loss of a job can come out of the blue. So, an emergency reserve is the first thing one should create, says Sadagopan. To the gentleman mentioned above, Sadagopan advised increasing the contingency kitty from three months to at least six months of expenses (household and obligatory).
"We advised keeping two and a half to three months' cash in a savings bank account and the remaining three months' funds in flexi-deposit or liquid funds. Six months worth of expenses in cash or in a liquid option should be enough to provide for your family's basic requirements while giving you ample time to look for another job," says Sadagopan. For flexi deposits, you need a savings bank account and a fixed deposit with the bank. The fixed deposit is linked to the savings account. In case there are insufficient funds in the account, the gap is automatically transferred from the fixed deposit to the savings account.
Complains P V Subramanyam of subramoney.com and a financial trainer: "Most individuals do not think of planning for such unforeseen circumstances. They will run for help only once the problem has cropped up, not when there is a likelihood of it. Most do not accept that they might also face bad times." He advises starting to increase the contingency funds or liquid investments even if there is a slight chance of an extreme event. More so in times like these, when there is no cheer in the economic environment and cost rationalisation is the only option for companies. Start early. Even if your job is safe, extra funds in hand are always helpful.
Subramanyam also advises a look at your financial commitments and discretionary expenses, which can be huge, especially in youngsters. "Many youngsters are seen to have over-leveraged their portfolios by putting money in real estate as investment. They are paying 50 per cent or more (of their monthly salaries) towards a home loan. And, they have many non-essential expenses. In bad times, there is very little these guys can hope to do to save cost," he warns. And, huge investments in real estate could be illiquid, as you cannot sell a property whenever you want cash.
Typically, financial planners advise having three months worth of expenses in cash or liquid mutual funds.
Here's how you can plan for the worst in anticipation of a job loss or salary cut:
Emergency kitty
When facing a job loss or salary cut situation, first look at increasing the emergency funds at hand, either by raising your cash holding or by increasing the investments in liquid instruments - income or liquid funds. According to mutual fund rating agency, Value Research, liquid funds have returned nearly 8.50 per cent in the past year and income funds have give over seven per cent in a year.
Some even advise having a six months' emergency kitty for household expenses and another kitty for a year worth of obligatory expenses like home loan repayment or children's school fee or insurance premium and so on.
The amount of emergency funds to be accumulated depends on a few factors - your obligatory expenses, whether or not your spouse is working, how soon you can get the next job, can you take a salary cut in place of a job loss, which level you work on and so forth. The provisioning can be lowered if you have a working spouse or if you've had to take a salary cut than face a pink slip or if you're already in talks for another job.
Sadagopan says as most individuals have a good portion of their investment in debt instruments, especially bank deposits, they already have three to six months of liquid investments at hand. You only need to work on their cash holding a bit and it can be sufficient for a year.
Separate contingency funds
A contingency kitty should not take into account your debt portfolio. Investments and emergency portfolio should be kept miles apart. The investment portfolio is linked to your future goal. Disturbing it or dipping into it because you are ill-prepared for bad times might have ripple effects. An emergency kitty is purely to rely on and use in bad times. It can be rebuilt once you tide over unforeseen times.
Risk management
Financial planners says individuals fearing a loss of job should remember they will not have employer-provided health cover or personal accident cover after moving out of the company. Also, their family members, especially elderly parents, will be at risk. Hence, you need to provision for this by either saving, separate from the contingency kitty, or buying a small family floater cover. At least a personal accident cover is important if it is a single income household, to prevent any drain on the pocket, they assert.
Double income households could still look at buying a health insurance/family floater plan at the earliest. Despite this, a small kitty could do you good if there are elderly people at home.
Non-essential expenses
Make a list of the non-essential expenses you make - weekly dining, shopping for retail therapy, catching up on all movies, weekend getaways and so on. Cut or lower these.
People attach sentiments to non-essential expenses, like shopping has a feel-good factor or I have promised to take my son out after his exams and so on. You need to detach yourself from these things. Be cautious in bad times, warn financial planners.
Subramanyam complains that many feel they deserve to eat out or party or take a break from work life. There are more important expenses to look at and work on than this.
If needed, stop investment temporarily
If you have ongoing commitments towards, say, a systematic investment plan for mutual funds, you could even consider stopping these temporarily, as cash might need to be diverted to household expenses, says Sadagopan. Cutting unnecessary expenses in such times and focusing on providing for your family will be a better option.
"Expecting a job loss is like anticipating fire-fighting. Therefore, we get in to a wait and watch mode and not make any further investments, as liquidity is of utmost importance in bad times. Even existing investments need to be relooked, if need be," adds Sadagopan.
You could continue with existing investments if you are already in talks for another job and will land one in say, the next two to three months. Or, if your spouse is also earning. Discontinue your investments temporarily if you feel you might not get another job in the next one to two months.
Don't touch surpluses
In case you have some surplus, such as a bonus or investment gain, park it in your savings bank account, in case it is needed. It could be later deployed for a medical emergency when you don't have a job or for children's education-related need(s) or some last-minute expenses.