How To Manage Finances After A Sudden Job Loss
A slowing economy sparks fears of layoffs. And while a sudden loss of employment can’t be foreseen, financial advisers say people can cushion themselves from such events. Creating a contingency fund is one way, along with buying adequate accident and health insurance.
Still, high expenses, many times on account of a home or a car loan EMI, make it difficult to save up enough to take care of three months of life without an income. How to financially deal with a job loss when there’s no contingency fund?
A few steps can provide some breathing room during the search for a new job:
Use Severance Pay As A Buffer
Employees in the formal sector fired out of turn are well within their rights to ask for severance pay. Employers usually offer three-month salary to compensate for the sudden loss of employment, but this can vary.
Amol Joshi, founder of PlanRupee Investment Services, says if you have a contingency fund, the lump sum received as severance package should be added to that and, ideally, be kept in a savings bank account or in an easily accessible investment option like a liquid debt fund.
In the absence of a contingency fund, severance pay can serve as one, reducing the burden on finances. Use it responsibly.
Take Stock Of Expenses
Take stock of monthly expenses. Harshvardhan Roongta, certified financial planner and founder of Roongta Securities, says you should ideally split them into a few main categories.
- In the first, put payments for utilities that you absolutely must pay, like electricity bill and rent.
- In another, pencil in the amount to be paid as EMIs on any outstanding loans.
- A separate category can be made for basic expenses for running your house.
- And finally, take into account the amount spent on investments like a systematic investment plan.
Till you find a new job, put fresh investments on hold. Also, buy health insurance if you were only covered by the previous employer against medical emergencies. Do remember, however, that most mediclaim policies have waiting periods on certain illnesses.
“You will need to buy health cover. There is no choice, because this is the time you’ve become more vulnerable,” said Roongta.
Once it’s clear what amount is needed to meet monthly finances, set that aside till you find a new job. Roongta estimates a person working in the formal sector needs to account for three months of spending. Otherwise, plan for six months.
Approach Your Bank
In case of an outstanding loan, irrespective of whether there’s enough money to pay the EMIs over the next few months, visit the bank and apprise them of the situation. That will help as you will be seen as proactive, and the lender won’t be blindsided by a missed payment, an official at a housing finance company, told BloombergQuint on the condition of anonymity.
Payments on a housing loan are non-negotiable because the house is available to the lender as collateral. If repayments stop, the lender can repossess it to recover dues.
“There are regulatory issues for providing moratorium or easing on EMI payments in case a retail borrower faces a financial problem,” said PK Gupta, managing director, retail and digital banking at State Bank of India. “However, refinancing of home loans takes place quite often and it is allowed without any penalty being charged. The borrowers also have option to take top-up loans.”
The top-up loan, Gupta said, is a facility banks offer for home improvement, and can be added to the home loan.
Joshi of PlanRupee Investment says if a borrower has a serious cash crunch, but is reasonably certain of landing a job within a couple of months, a top-up loan is a good choice.
The next option, Joshi suggests, is refinancing if the borrower has repaid a sizeable amount of the principal. The longer you’ve been paying a loan back, the better it is, because repayment schedules are such that the initial EMIs have a larger proportion of interest payments. So, if you’ve pre-paid part of the home loan, principal amount will have reduced substantially.
Lenders have the option to extend the tenor of a loan up to its original level. That is, if a borrower has been paying back a 15-year loan for eight years, the bank has the option to extend the tenor again to 15 years. The outstanding principal determines the new EMI, and will therefore be lower than the earlier one, especially if the original principal has come down substantially.
Another option is to liquidate investments. A partial liquidation could help pay EMIs for the next few months.
For smaller borrowings like vehicles or personal loans, consider liquidating investments to repay them completely to ease the burden on monthly cash flow.
Avoid Breaking The Piggy Bank
If possible, Joshi says, you should avoid breaking your long-term investments. But, if push comes to shove there is a hierarchy to follow.
“First and foremost, you can break your recurring and fixed deposits, because as we know these investments are not tax efficient. And you will have lower mark-to-market losses, if any,” said Joshi. “My second choice, with regard to breaking long-term investments is debt mutual funds.”
Debt investments, by their very nature, are meant to be the secure portion of your portfolio. They are meant to give you a steady income without volatility, and can be accessed easily in the event of an emergency.
Third, according to Joshi, is stock portfolio. “If you’re invested in equities, you can choose to prune the portfolio selectively to take care of your immediate fund requirements. After this, you can consider liquidating your equity mutual fund schemes.”
Finally, Joshi said, if you don’t have any of the first four assets, there’s still provident fund. Every employee makes contributions to the Employees’ Provident Fund and this is matched by employers. Originally intended as a retirement fund, this can also be broken in the event of unemployment.
The rules allow withdrawal of 75 percent after one month of unemployment, and the rest after two months.
This should only be used as a last resort, according to Joshi. One, because processing a withdrawal takes time. Also, and more importantly, this amount is meant to secure retired life. “You don’t generally put a piggybank back together once it’s broken—you start anew.”
Cut Your Expenses
With resources likely to be severely limited at least for a few months, go easy on the spending. Gaurav Mashruwala, certified financial planner, suggests a step-down method.
If travelling in a chauffeur-driven car, choose to drive yourself, or carpool, or use a ride-hailing application or public transport.
“Similarly, when it comes to entertainment and eating out. You could either choose to have a fine-dining experience, or you could come down to a regular restaurant, or order in, or you can do a potluck with friends,” said Mashruwala. “So step-down is a method where you’re not completely depriving yourself, but you’re taking one step down in terms of spending.”
Not giving up everything ensures that you’re not adding to the stress. And that allows you to focus on bouncing back.
(With inputs from Advait Rao Palepu)