Things Can Go Wrong — Accept and Plan for It

A chain is only as strong as its weakest link. Similarly, your financial plan is only as good as your financial ability to handle a crisis. Why? Because things go wrong.

Recently, Jet Airways shut down its operations indefinitely. Even before the shutdown, there were news about employees not being paid salary for months. Now that the airline has shut down due to paucity of funds, the situation looks even grim. Since then, social media has been flooded with many stories about how the employees are facing financial constraints, struggling with their loan commitments and their EMIs. Many had to resort to short term loans, sale of assets and even family jewellery to keep the cashflow machinery running.

Things can go wrong. Accept and Plan for it
Things can go wrong. Accept and Plan for it

One account that struck me went like this: A highly paid employee had a home loan of about Rs 60 lacs. A friend suggested him to reduce the loan amount. He prepaid the home loan by Rs 30 lacs. Thereafter, he took out a car loan of Rs 30 lacs to purchase a super luxury car. The same person was now struggling to pay his EMIs. I cannot verify if this account is true. However, I can confidently say that this is not an isolated case.

Many of us indulge in excesses when it comes to borrowing. And I am not writing about living above your means. Your current income may comfortably support big loans. However, before taking a loan, you must also consider the various “what-ifs”. What if you were to lose your job and could not find another job? What if you could find a job but the new salary was half the new one? How will you afford your lifestyle and loans? With certain lifestyle expenses, you can at least avoid them. It wouldn’t hurt you if you don’t visit your favourite restaurant for a few months. However, loan EMIs must be paid and non-discretionary expenses must be incurred. Where will the money for such expenses come from? And it is not that you did something wrong. There are things beyond your control. You may be doing your job very well. However, the same can’t be said about your company. What if your company can’t afford your salary after a few months? What if the entire industry or the economy faces duress? Not your fault but you can still suffer.

What Should You Do?

There is no point worrying about things that are way beyond your control. Good to hear, but is that even a plan? We are not talking about natural calamities which are really beyond your control. We are talking about the financial impact of certain adverse events in your professional life. The financial impact of these adverse events can certainly be mellowed. You can ensure that you do not have to sell your family assets if you don’t get salary for 3 months. You can ensure that you do not have to default on your loan EMIs even if you are without job for a few months. You can ensure that you do not panic and think with a clear and calm mind.

Here is how you can soften the blow:

#1 Exercise discretion when you borrow. Taking an affordable loan to purchase a house is fine. Taking an education loan is fine. However, taking a Rs 10 lac loan to fund a vacation or a Rs 30 lac loan to purchase a luxury car is not smart in my opinion. Such discretionary expenses must come from your own funds and not borrowed funds. Remember you may be able to afford these needless loans easily. However, consider the “what-ifs”.

#2 Ring-fence your finances. Many time, loss of income can be due to a health issues or a major injury. Purchase adequate life, health and disability insurance. This is particularly relevant if you are self-employed. A salaried employee will get a medical leave for a few months in case of hospitalization or even a major injury. If you are self-employed, it may mean complete loss of income. A lot also depends on how much contingency you have built in your business. If your business can function without you for some time, then the impact may be lower. Additionally, disability can create problems even for salaried employees. You need to have adequate insurance covers.

#3 Keep buffers. Don’t take things for granted. Good times may not always continue. Build up an adequate emergency buffer. If your skills are diversified and portable, you can do with a buffer of 6-8 months of expenses, including loan EMIs. If you have a niche job or are self-employed, you need a much bigger buffer. This also implies that you must keep working on your skills to keep yourself employable even outside your current organization. You can keep this buffer in fixed deposits or quality debt mutual funds.

#4 Don’t score self-goals. When you see uncertainty in your job or income, do not pursue needless lifestyle choices on credit. It is easy to swipe your credit card because you do not have pay immediately, but you must pay eventually. Sometimes, it is not easy to appreciate how difficult things can turn out to be. We feel that things will get back to normal. That may not always happen. Exercise restraint during such times.

I regularly come across people with very high incomes but limited to show by way of liquid assets. It is easy to see that a lot of money went into expensive lifestyle choices or purchase of illiquid assets. Clearly, their ability to handle a crisis is quite low. By the way, there is nothing wrong in living a life that you want for yourself and your family. However, you must ensure that the “what-ifs” are covered.

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