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HOW TO MANAGE
FINANCES
IF YOU LOSE
YOUR JOB
Flexibility in cash flows will help you to weather
the storm better.
how to manage your finances in the event of a job
loss.
Phailin
was one of the most powerful cyclones to hit India in recent times.
Raging
winds and rain plundered the eastern coast. Over 26 lakh trees lay flattened.
However,
the palm trees survived most of the carnage. The palm's
flexibility--its
sturdy trunk can bend over 50 degrees without snapping-enabled
it
to bear the disaster far better than other trees.
Similar
flexibility in your fi nances is also critical in emergencies like accidents,
illnesses
or job loss. The flexibility determines if you will achieve your life goals
with
certainty. Flexibility can be looked at from two perspectives--assets and
cash
flows.
Flexibility
in assets
Many
of you have a large proportion of your portfolio in real estate, unlisted
stocks
and bonds with long lock-ins, art or antiques. These assets cannot be easily
converted
into cash. It may be difficult to find buyers at short notice, and even
if
you do, you may have to sell at a discount.They also carry a fair amount of
risk,
especially
when markets are volatile. It is important to ensure that not more than
half
your portfolio is invested in illiquid assets.
Flexibility
in cash flows
You
can divide your cash flows into three categories--fixed, regular and
discretionary.
Fixed cash flows include expenses such as rent, EMIs, school fees
and
insurance premium. Regular cash flows include groceries, utilities, fuel,
domestic
help etc. The latter occur at a regular frequency, but the amounts may
vary.
One may be able to reduce these expenses if needed. Discretionary cash
flows
are expenses that can be dispensed with. These can include money spent
on
vacations, entertainment, eating out, shopping, donations etc.
The
amount you hold in each category determines how flexible your cash flows are.
A large proportion of your cash flows being either fixed or regular imposes
rigidity and inflexibility. Reducing expenses
to
handle emergencies becomes difficult. On the other hand, if a large
proportion
of
your cash flows are discretionary, then your cash flows are very flexible.
Even
if no income were to come in for a few months, you can manage easily
for
a longer time by reducing these expenses.
Flexibility
in cash flows enables better handling of a job loss.With inflexible
cash
flows, if you suffer a job loss, your next job quickly needs to pay you the
same
income so that you can sustain your expenses. Further, you will hesitate
to
take risks with your job. Fewer loans improve the flexibility of your cash
flow,
so
strive to reduce your debts while you are employed.
Having
flexibility in both your cash flows and assets is desirable.If your assets
are
flexible and adequate, then you can manage even if your cash flows are
inflexible.
You can redeem these assets easily and sustain your expenses for longer.
Thus
if you suffer a job loss, you can take time to find the right job and not
jump
at
the first opportunity that comes your way. Problems arise when both cash
flows
and
assets are inflexible. You should have an emergency fund to handle job
losses.
This
fund should typically be sufficient to handle routine expenses for six
months,
and
your annual fixed payments such as insurance premiums and school fees.
The
money can be invested in an ultra-short debt mutual fund, which offers you
almost
three times the return of your bank savings account.
The
largest asset of all is you. In your working years, you are a money-making
asset,
since you provide the money for routine expenses and for funding your
long-term
goals. Banks lend you money on the basis of your earning potential,
which
you repay over time. Adequate life insurance covers all your liabilities,
protecting
your long-term goals and ensuring that the family's routine expenses
are
met.
Illness
or disability could put you out of work for long periods.You must put in
place
a healthy medical cover for you and your family. This will ensure that you
do
not dip into your personal funds for medical expenses. Disability and
critical
illness
covers give you an additional lump sum, which help fund your routine
expenses
during the time you are away from work. Your health insurance can
take
care of your medical expenses.
If
you have a home loan, insure yourself against job loss. These covers pay three
EMIs
in case you lose your job. They are usually available for five years and need
be
renewed. The caveat is that the job loss must not be due to underperformance.
These
covers are usually bundled with mortgage insurance policies and are not
available
as standalone.
Job
losses do not have to be stressful. Sometimes, they open up opportunities for
you
to pursue your passion.
Building
a retrenchment-proof financial plan ensures that you weather the storms
in
the short run and make the right career choices in the long run.
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Priya Sunder ETW 23MAR15
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