How A Middle Class Family Can Plan Finances During Corona Crisis

The coronavirus has taken its toll on society - both on the health of the common man and disruption of economic activity. And those working as consultants/in the gig economy along with small businesses/non-essential shops have been hit. In this rather difficult situation, a key question that pops up repeatedly - how does one plan finances during the crisis and the aftermath to meet both the short-term and long-term financial goals of a family?

The immediate requirement for middle class families in the short term is to draw up a budget - on one side, they need to take into account all their income streams - it could be salaries, gig income/consultancy income, rent from flat, government pension, interest from fixed deposits or government bonds, and dividends from companies etc. On the other side of the budget, they need to include their monthly expenses which typically includes groceries, school fees, rent or EMI for flat, mobile and electricity bills, costs related to running 2-and 4-wheelers, and medical expenses amongst others.

In the current scenario, most families across the country are grappling with a sudden loss of income which could be in the form of reduced/considerably curtailed salary/gig income/consultancy income. Also, for those families which rely on monthly rental income, they may experience hiccups, with tenants finding it difficult to pay rent during this pandemic.

As a result, an immediate financial planning requirement for most middle class families would be to review and curtail unnecessary/avoidable expenditure. For instance, in middle class families, one does find two or three cable TV connections in a home, and if practical, it could be reduced to just one. The above measure could result in savings of Rs 700 -1,000 per month.

Similarly, daily expenses on groceries could be reduced by better planning and not overstocking daily essential products. In addition, as far as possible, ordering of pizza/takeaway foods from popular brands/neighborhood restaurants should be avoided and that would help save thousands of rupees each month.

Vinod Jain, a leading New Delhi-based chartered accountant and financial planner, said, "Pruning out unnecessary daily expenses is key, but it should be done in such a way that it does not disturb the morale of a family."

Most middle class families also have a contingency/emergency fund, which typically consists of 3 or even 6 months of income set aside in a separate bank account. Financial planners argue that funds from the above account could be utilized for important expense heads of a family like EMI for flat/groceries/medical expenses.

The RBI had recently permitted a three-month moratorium for home and car loans, but experts argue that it would result in the duration of the loan being extended by the corresponding period. Home loans are for typically 15-20 years duration, and if one takes this loan at the age of 35 years, an extension of the loan repayment period by three months could result in considerable financial pressure at the age of 55. Vinod Jain advises if possible stick to the loan payment schedule originally set out before the crisis, and it will help free up resources of the family for long-term investments.

Meeting long-term financial goals

Long-term financial goals of a family include commitments that require considerable funds - like paying for child/children's engineering or medical college fees or the down payment of a flat/house or providing a corpus for the retirement years.

And creating a large corpus of funds of say Rs 50 lakh or even Rs 1 crore, even in normal circumstances, requires considerable planning and understanding of the risk profile of a family, including the age profile of the income earners of the family, number of dependents in a family.

Financial experts highlight that families would need a combination of low-risk instruments like fixed deposits along with higher risks instruments like investment in the stock market to build a large corpus.

Motilal Oswal, Group MD of Motilal Oswal Financial Services, said, "Investors need to keep a balance of fixed and equity instruments for growing their long-term portfolio, and patience is the key while investing in the stock market."

Typically, 30-50% of a family's savings is allocated to fixed deposits, and most banks, government-run and leading private sector banks offer their FD holders the option of earning interest on a monthly or quarterly basis. In addition, most banks offer senior citizens (60 years or more) half per cent more.

Individuals also have the option of recurring fixed deposits - depositing Rs 3,000 or Rs 5,000 or higher amounts per month for a duration of say 10 years, and they could earn regular interest.

Fixed deposit interest rates of key banks for non-seniors (tenure of 1 year)

SBI: 5.7 %

HDFC Bank: 5.8 %

ICICI Bank: 5.8 %

Source: Respective bank websites

Investing in the stock market

Investing in the stock market directly requires considerable knowledge in companies/sectors/economy and also managing effectively the volatility on the bourses. The uncertainty related to the coronavirus with its impact on the broader economy has resulted in considerable nervousness on Dalal Street.

For instance, the key stock market barometer, the BSE Sensex, ended Friday, April 17, 2020, at 31,588 and it has declined nearly 25 per cent from its peak of 42,273 that was reached on 20 January 2020.

As a result, experts increasingly advocate that investors should not make large direct lump sum investments in the equity market, given the high risk. A more prudent strategy would be to invest a certain small amount every month, for instance, Rs 3,000 or Rs 5,000 or Rs 8,000 or more, via systematic investment plans (SIP) in the equity schemes of mutual funds for several years - 5 or 10 or even 15 years, taking into account the long-term financial goals of the family. 

Returns of equity schemes with investment of five years

Kotak Equity Opportunities Fund - Direct Plan - 5.8 per cent

SBI Bluechip Fund - Direct Plan - 3.6 per cent

HDFC Equity Fund - Direct Plan - 1.9 per cent

Source: Value research website

(The author is a financial journalist.)

Disclaimer: The opinions expressed within this article are the personal opinions of the author. The facts and opinions appearing in the article do not reflect the views of NDTV and NDTV does not assume any responsibility or liability for the same.