When it rains, it pours. There's been an avalanche of bad news: first the sub-prime crisis, then global recession and now financial frauds. Of course, the major fall out has been job loss. But what's important now is how you cope with this crisis; more importantly, coping with losing a regular source of income.
You can't anticipate losing a job, but you can financially prepare yourself for critical times. We look at different Scenarios where Certified financial planner Kartik Jhaveri tips you on how to go about things.
Case1: You lost your job, no or very little savings to fall back on
Scenario 1: You have a home loan, vehicle loan or a personal loan
Write a letter to the concerned bank explaining your circumstances. Inform them that you would be unable to pay the EMI for two or three months or till you get a job. Usually, banks don't begin follow ups for defaults before three to six months. Nevertheless, it makes sense to write to them giving an explanation.
Tip: If you have spare funds, pay off your vehicle loan first. The reason being, if you default on your vehicle loan, banks can take possession of the vehicle immediately. For a home loan, the procedure for possession is longer.
After the vehicle loan, try and pay off your home loan backlogs and keep your personal loan for last.
Caution: Do not take a loan to pay off another loan. It would only add to your burden. If you have no money, selling off the car may be an option to consider. But don't sell off your home. Read on to find out why.
Scenario 2: You have to pay regular investment installments like premiums or SIPs
Insurance premiums
This depends on what the policy is. If it's a term insurance, you can afford to skip a few premiums. The company can always re-instate your lapsed policy (anytime before 5 years), at a cost. But remember that during this time, your cover will cease to exist.
If you are unsure about letting the policy lapse, try and make it paid up, that is reduce your sum assured in proportion to the premium already paid. Learn about that option here .
If you have taken a ULIP plan and have been paying a premium, Jhaveri recommends that you complete the statutory period. If you miss the premium for a couple of months after you have completed the statutory period, the insurance benefit ceases to exist but the company can always reinstate the policy.
However, if you have still not completed the statutory period, Jhaveri says, as a last resort, let the policy lapse. The fact is, as he says, "ULIPs are not a good investment product."
Other investment installments like SIPs
If you have no savings to fall back on, obviously you were living on paycheck-to-paycheck. So it goes without saying that you simply stop all investments.
Scenario 3: You have a house; should you sell it?
God forbid, it comes to that, but when things are not going your way thoughts about selling your house can come to your mind.
Irrespective of whether your home is on loan or not, Jhaveri recommends to stay put; don't sell your house. Here's why - not many owners would be willing to rent a house to you when you don't have a regular source of income. Usually, owners require you to pay deposit or 1-years' rent in advance or require some backing from your employer. So, bide your time and hold on to your house.
Tip: It goes without saying that you must cut down luxuries and live frugally. That means, if you have a vehicle that was extravagant in the first place, forget about keeping the loan alive. You ought to sell the vehicle.
Scenario 4: You need to pay rent on your home
If you don't have enough cash to pay the rent, try and negotiate with the owner. Some owners may be willing to take rent after two or three months depending on your relationship with them.
You could request the owner to adjust the rent from your deposit. It's an option but you'd be expected to make good the amount when you find a regular source of income. That is, if your owner has adjusted for Rs 50,000, you'd be expected to pay it back as a lump sum. Again, it varies from Caseto case.
That said, don't expect all owners to be accommodative. After all, they would have bought the property as an investment and you can't expect them to offer rent-free accommodation even if it is for a short period.
Case2: You haven't lost your job but things are critical
You can still safeguard your future by doing some of the following:
1. Create a budget. Jot down your income and deduct your basic expenses. This will leave you with enough money to save, which you could park in say a bank fixed deposit that would give you an interest of 8 per cent per annum.
2. Create at least three to six months worth of contingency funds.
3. Make sure your EMI does not exceed 30 per cent of your income.
4. Forget luxury expenditure such as fancy car, renovating your home, now. Be frugal and save every penny for rainy days.
5. Moonlighting can bring in the much needed additional money. So be open to interesting opportunities to make more money.
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