Get used to a New Normal for Your Financial Life Too
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As many cities continue to be under lockdown, I wonder whether the new normal of the future will resemble anything of the past. Will we ever go to a movie theatre, breathing in the same air as 200 other people? Or watch a live IPL match with 50,000 strangers? Will we continue to hold our breath when a neighbour steps into the elevator, or leave home without masks? Just as we are getting our heads around a new normal when it comes to our lifestyle, we also need to think about a new normal when it comes to our money.
We make decisions with respect to our financial plans based on the available information at a point of time. However, life is not a straight line. It is volatile like many of the investments we make. The volatility can come from the market environment, instrument performance, regulations and your personal situation.
We may need to revisit plans we made in the middle of a sustained bull or bear market when the cycle changes. A strong scheme may go through a protracted down phase. The tax treatment of an instrument may make it more desirable or less suitable in the current circumstance. An inheritance or an unexpected surge of medical bills may change our financial situation dramatically.
While it is important to remain calm during volatility and stick to our long-term goals, even those long-term goals need short-term, tactical course corrections to ensure that they remain viable. Hence, changes or disruptions make the review process in financial planning very important. Periodic reviews that analyse the current set of circumstances and their bearing on our future goals help us to make the necessary tweaks and ensure the plan stays aligned with those goals.
When a major disruption such as covid-19 occurs, doing nothing is not an option. As intelligent beings, it is only natural that we would want to jump right in and fix what is broken. There are plenty of questions running through our minds. Are our retirement plans still on track, or should we rework those retirement projections in the face of the current uncertainty? Should we defer our early retirement goals by a few years given the dip in the portfolio corpus? But if early retirement is a non-negotiable goal, should we tighten our expenses and continue to accumulate assets towards the retirement corpus? If we are already well into retirement, do we need to re-look our withdrawal rates?
For many of us, our cash flows have been affected because of pay cuts or job losses. While several of the discretionary outflows such as vacations, entertainment or hobbies may not be viable for some time, we may still need to trim expenses to realign to a reduced salary. For those of us who have ongoing systematic investment plans (SIPs) into long-term investments, it may be worthwhile stopping those and building up short-term liquidity instead.
If we are approaching important milestones that require large money outflows, such as buying a property or funding undergraduate or postgraduate education abroad, we may need to defer those decisions by a few years or partially fund those goals, if funding them entirely impacts our future financial independence. And frankly, the idea of buying a house in a bustling city amid a large population is beginning to look far less alluring by the day.
Investment deductions and salary exemptions that provide huge tax benefits in the old tax structure provides no such benefit in the new structure. The tax benefit you enjoyed on the interest component of your home loan may well turn out to be just an expense now. Hence, if you choose the new structure, you may consider closing or reducing your home loan, so you do not have a committed outflow each month.
Market volatility also presents mouth-watering opportunities for investment. If you are committed to maintaining your required asset allocation, periodic portfolio rebalancing will instil the discipline of buying low and selling high. You will also do better than most of the investing population whose decisions are primarily driven by emotions rather than financial prudence.
Above all, we must ensure our life and health are adequately covered. Do not let existing life and health covers lapse. Reinstating those policies may require fresh medical tests and expose us to the risk that the policy may not be issued because of an underlying health condition.
Only a cure for or a vaccination to prevent covid-19 will bring the hope of normalcy. Until then, we should invest in our physical and financial health. Stay tuned to the big picture, while making small course adjustments along the financial journey. Whether it is increasing our contingency budget, reducing or postponing expenses, increasing or decreasing SIPs, or reducing or closing out loans, we must take constructive actions on our financial plan. This way we will control, rather than let events control, our financial destiny.