After COVID-19 has taken the world by storm,
most countries are cautiously restarting their economies. While businesses are
keeping a firm eye on the here and now, they are also keeping track of what’s
to be expected of a great post-COVID economic reset. In the past few weeks, the
COVID-19 pandemic has appeared to gather strength which is grim news for most
economies, including our own. A survey by McKinsey & Company reveals that
52% of executives across the globe agree that their national economies are
performing substantially worse as a result of COVID-19. This is 10% higher than
the number who agreed in March of 2020.
Source: McKinsey and Company
At the same time, many executives are also
expecting their business’s profits to grow within the next six months as the
economy slowly restarts. Our own economy’s slowdown is to be expected, based on
the current sentiment. The purpose of a financial plan today is more important
than ever. COVID-19 has woken many up to the possibility that we can always be
at the cusp of an impending crisis. The current impact on the economy has been
so massive that businesses will tenaciously reopen services. In general,
although most people are expecting progress, they are expecting slow progress.
Financial Planning During an Extended Slowdown: The Benefits
Planning your finances is healthy whether or
not you are experiencing a lagging economy. However, here’s why it is
especially helpful when you are experiencing an extended economic slowdown or
recession.
● Building a Nest Egg:
Most financial planning involves creating a nest egg that is to be used during emergencies. One can save up their nest egg for a new house, car, or any other big-budget purchase. However, in case the economy is slower than one expects and job security is on the low, this nest egg can serve as necessary funds that can finance you and your loved ones through a financial crisis. Hence, start planning your finances such that you save at least 30% of your monthly income towards your nest egg.
● Wealth Creation:
Beyond simply saving for a rainy day, planning your finances now can steadily help you accumulate wealth over time. During an economic slowdown, having a financial plan that is geared towards investing a small amount in mutual funds that will grow over time like equity SIPs can help you in the long term. Mutual fund SIPs are incredibly convenient tools as you can start with small investments each month that gradually grow into lump-sum amounts as the mutual fund grows.
● Coming Out Stronger:
Although it may seem counterintuitive, a financial plan during an economic slowdown can work in your favor and actually help you profit. In fact, many tactical investors use a recession to their advantage by using strategies such as buying into dividends, investing in high performing consumer staples, and using rupee-cost averaging when share prices fall. These strategies help you not only weather the financial recession but use the economy’s current performance in your favor when it slowly restarts.
● Cutting Out Unnecessary Expenses:
Creating a financial plan involves the use of budgeting. When people budget, they typically evaluate their expenses comprehensively to assess which expenses can be shifted around, simply reduced, or stopped completely. During a slow economy you do not want your precious funds going into places where you are yielding little to no benefit, such as a calling or text message subscription you do not use, or a certain service that you are paying monthly membership bills for. Cut out all unnecessary expenses to keep your money safe somewhere it can earn with interest.
● Creating a Recession-Portfolio:
Financial planning can allow you to plan your mutual fund investments in a way that they are geared towards recession-friendly funds. These are typically SIPs in debt instruments such as government bonds and more as these instruments are much less volatile and give better returns than non-market linked savings instruments. Perhaps you are looking for more cash flow during this time, and hence liquid mutual funds will serve you better. Once you gear your financial portfolio towards a slower economy you can invest smartly such that your funds continue to grow even if the economy is lagging.
Whatever your financial plan is during a post-pandemic slow down, taking the help of experts is never a bad idea. With Tata Capital’s Wealth Management solutions, you receive the best portfolio guidance for the current economic climate. For those who are confused about how to organize their finances during the ongoing pandemic, Tata Capital’s Wealth Management solutions can aid you in planning your SIP mutual fund investments, and other wealth creation products that help you maximize your earnings.
16 October 2020
5 mins read
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