During the Great Depression, one in four Americans did not have a job. Today, that number is more like one in 10. So things are really not as bad as they can get, claim some experts. What they forget is that the recession this time around is global and almost every working person is feeling the impact. The International Labor Organisation estimates that if the global recession continues, more than five crore people across the world would have lost their jobs by the end of 2009.
What such studies don't reveal is the number of people who have had to take salary cuts, and an even larger number who work in organisations that have announced a bonus freeze. And these companies are spread across the world. It's all very well to say that India is not in a recession; the fact is that thanks to outsourcing and a hugely globalised economy, job insecurity is rife in the country. We all know people who have been asked to leave, many of us know that we won't get a bonus this year, and those who do get it, realise it will be a fraction of what they would have got in happier times.
There's nothing we can do except make the best of what we have. Surveys show that job and career Websites are reporting a perceptible rise in traffic, not just to find jobs but to look for tips on recession-proof jobs (education, healthcare, security, etc), or even part-time work. There are tips galore on how you should sell results, not skills, how you should prove that you can either make or save money for your company, and how you can negotiate a better structured salary so that you don't miss the bonus payment.
Over the next several pages, we take you through the various ways in which you can cope with job insecurity or even job loss. We look at viable alternatives to a full-time 'office job'-by building your existing skills, by striking out on your own, even by taking up part-time or freelance assignments.
| A professional in a sunrise sector, who won't get any variable pay this year, and whose salary of Rs 70,000 a month will be cut by 5% from April 2009. |
| - EMIs (home and personal loans) constitute 50% of his salary. |
For those who still have jobs but are forced to take a pay cut or deferred bonus payments, there are ways of negotiating your existing work and salary to allow you to manage. We even look at how a job loss could have a positive impact on your career. Through all these, there runs a constant thread: how to manage your finances.
Whether you consider moonlighting, part-time work, entrepreneurship or skill-building, it's vital that you keep an eagle eye on your finances because jobs are not the only victim of the recession. Prices are going up even as salaries fall or dry up. Yes, the writing has been on the wall ever since the sub-prime crisis hit the US, but we in India have believed that we would be insulated from its ill-effects.
The RBI bolstered this view, when, in its mid-term policy review in September 2008, it estimated that the GDP would grow by 7.5% this year.
Pune-based Vineet Mahajan was so confident that the US economic crisis would not affect him that he bought a house for Rs 40 lakh in late 2008. Mahajan's monthly income was Rs 70,000 and the home loan EMI worked out to Rs 30,000-or over 40% of his salary. He believed that his bonus payment and performance-linked incentives would more than take care of the loan repayment. In fact, he was so confident that he added a personal loan (to buy furniture), increasing his EMI by Rs 7,000.
Mahajan was in his happy bubble till about a month ago, when his company announced that due to low sales, cancelled orders and a sagging bottom line, there would be no variable income next year. And from April this year, employees also have to face a 5% salary cut. In very non-financial terms, Mahajan is in hot water. Apart from the fact that from April, he will be spending over 50% of his income to repay his loans, he also has to shell out Rs 40,000 as annual premium on a Ulip that he bought last March. If he doesn't pay, the policy will lapse and the premium will be forfeited.
It may be cold comfort, but Mahajan is not as badly off as the people who have lost their jobs. Here's a bit of good news. You can still meet your financial commitments. It calls for changes in your investment and spending patterns, as well as some adjustment in your current lifestyle, but these changes will pay off.
Repay loans
The first step towards some financial sanity is to draw up a list of your expenses, which includes all loans, bills and regular payments. Sort out these expenses on the basis of priority, keeping the loans upfront. This is because lenders are quick to react (especially during times like these) when faced with a delayed payment or a cheque that's not honoured by the bank. A good credit record is what will separate you from the bad guys (in the lender's opinion), and if you don't default, a lender may be willing to give you a longer rope when you really need it.
But what if you simply don't have enough money to pay the EMI? Banks do offer several repayment options (see box). "Many borrowers have approached us with such problems. While it is not possible to allow zero payments, we do consider rescheduling their loans if their repayment record has been good," says Manish Jain, vice-president, retail banking, Axis Bank.
It's also a good idea to unlock the value of your property in times of a crunch. If your house is not mortgaged, you can take a loan against it. This is better than a personal loan in many respects: the interest rate is lower and you are charged from the day of withdrawal till the day of repayment.
Be realistic when assessing your loan portfolio and repayment capacity. Is your income loss temporary? Are you confident that you will find a job in three-four months? How big will your next increment be? Answer these questions honestly to find out how you are placed. If your auto loan EMI is beyond your means and you still have five years to repay, you might be better off selling the vehicle. A vehicle is a depreciating asset and if you delay the sale by a year, its price will come down by another 20%. Finally, remember this: "It's usually not a good idea to take one loan to repay another," says Harsh Roongta, CEO of Apnaloan.com. "You are only digging a bigger hole if you take a loan to pay for a car that you can't afford."
Cover your Health
Spend money on health insurance. No, we haven't gone raving mad telling you to shell out one more premium at a time when you should be saving all your resources. The sad fact is that if you have lost your job (or a pink slip is imminent), you're not just foregoing your salary but also the perks. One of these is the group medical policy that most companies offer, and one that ends the minute you cease to be an employee.
Many people might see medical insurance as an unnecessary expense when they are low on funds. But this is precisely the time they should consider taking medical cover for themselves and their family. The logic is simple: if someone is finding it difficult to pay a premium of Rs 4,000-5,000 for medical insurance, how will he manage to pay the hospital bill of Rs 40,000-50,000 in case of an emergency? "Health insurance is a must because an unemployed person may not have the money to pay for treatment if somebody in the family requires hospitalisation," says Yashish Dahiya, CEO of Policy Bazaar.
The good news is that there are plenty of policies available. Rahul Aggarwal, CEO of Optima Insurance Brokers, advises a basic floating cover for the entire family. A Rs 2-lakh cover for a family of four would cost about Rs 3,500 per year. That's a small price to pay for your peace of mind for the rest of the year.
Life insurance
Next on the list of priorities are premiums for life insurance policies. If it is a Ulip and three premiums have already been paid, you can delay (or even skip) the premium. This is because the value of the units accumulated over three years is normally enough to continue paying the premium for several years.
What if you have a traditional endowment or money-back plan? There's some good news here as life insurance companies offer several premium-paying options. Also, unlike Ulips, insurance companies are willing to restart endowment and money-back policies even after several years of missed payments. “Many people make the mistake of assuming that if they don't pay the premium and the policy lapses, it cannot be revived,” says U.S. Roy, CEO and MD, SBI Life Insurance.
If you are sure that your money crunch is temporary, you can take a loan from the insurance company to pay the premium. LIC charges a flat rate of 9% on such loans, while private insurers charge a little more. You can even switch from an annual option to a monthly payment option. “The monthly option is psychologically less intimidating than the annual option in case of high-premium policies,” says Debasis Sarkar, senior director and chief marketing officer of Max New York Life.
Many people have a bouquet of insurance policies-money-back, endowment, Ulips and term plans. While the premiums for almost all plans can be deferred, the term plan premium has to be paid when it is due. “One should pay the term plan premium first,” says Roy. This is because if the term plan lapses, it cannot be revived and a new policy will come at a higher price.
Lifestyle changes
For over a year, Money Today carried a regular feature on how small savings over time can result in the creation of wealth. That was not an academic exercise. It might be a good idea to take a look at some of those ideas now (visit www.moneytoday. in and search for 'Small Fortune'). For instance, don't send out for your afternoon pick-me-up from a coffee shop. The stuff dished out by your office vending machine may not be as good as a frothy cappuccino from, say, Barista, but it's not going to cost you Rs 50. “While the prices of coffee have come down in the past decade, the prices of cappuccinos at coffee shops have gone up,” says Subramanyam. Saving Rs 50 a day can add up to Rs 1,500 a month. Similarly, instead of eating out four times a month, just go once a fortnight and save about Rs 1,500 a month. Make these two small lifestyle sacrifices and save Rs 36,000 a year. Do the same with stuff like a floor-cleaner, where an unbranded version costs a fraction of the branded one, but does pretty much the same job. To repeat a cliche, little drops of water make a mighty ocean.
Simple Strategies
Insurance policies
Traditional insurance plans offer several options to policyholders if they are facing a liquidity crunch and can't pay the premium.
Strategy 1 Skip premium for 3-year-old policy
The impact: Life cover will stop but policy can be revived by paying penalty.
Watch out for: Policyholder will not be covered if the premium has not been paid. This defeats the purpose of insurance.
Strategy 2 Take loan on policy to pay premium
The impact: LIC gives loans at 9% per annum. Other insurers also offer this option. Life insurance cover continues.
Watch out for: At best a stop-gap arrangement. Avoid adding to debt burden if income crunch is likely to get extended.
Strategy 3 Convert it to a paid-up policy
The impact: The insurance cover will come down but will not end completely.
Watch out for: Reduction in life cover compromises financial security of family.
Strategy 4 Change the payment option
The impact: If unable to pay a lump sum, switch to a monthly or quarterly payment.
Watch out for: Premium is higher in these options. Also, it adds to paperwo
Budgeting Expenses
Too much month left at the end of your money? Here are a few simple strategies that could help you tide over the financial tsunami.
Strategy 1 Cut down on luxuries
The impact: Cut down on eating out. Avoid coffee breaks at Barista. Don't go for big brands. Join a car pool.
Watch out for: Sudden lifestyle changes can be difficult and emotionally traumatic.
Strategy 2 Shift to a smaller house
The impact: Shifting from a 3-bedroom swanky apartment to a modest 2-bedroom flat can cut the rental cost by almost half.
Watch out for: Location is crucial. If the new area is far flung, the gains from lower rent may be offset by higher cost of travel.
Strategy 3 Unlock value of fixed assets
The impact: Credit against a house or car can help get over a crunch. Such a loan is cheaper and more convenient.
Watch out for: Use this facility carefully. The sudden infusion of liquidity can be dangerous for the undisciplined spender.
Investing & Saving
If there is uncertainty about future income, your first step should be to reduce the risk in your investment portfolio and focus instead on capital protection.
Strategy 1 Exit from stocks completely
The impact: Eliminates risk in the portfolio. If you have lost your job, stick to risk-free deposits to protect capital.
Watch out for: Selling stocks when markets are low may result in losses. Also, you lose out if markets recover.
Strategy 2 Reduce equity exposure to 10%
The impact: If household income has declined, reduce the risk but keep a window of opportunity open. Useful for former double-income families.
Watch out for: Reducing equity exposure can result in opportunity loss.
Strategy 3 Sell shares, buy index funds
The impact: Index funds are less risky than individual stocks or regular mutual funds because they invest in a basket of blue-chip shares.
Watch out for: Index funds may not be able to match the returns from direct investments in equities or diversified equity funds.
LOANS & EMIs
Unable to pay your EMI? If your record is good, your bank may offer you easy repayment options. But sometimes you may be better off disposing of the asset.
STRATEGY 1 Extend tenure of the loan
The impact: The home loan EMI comes down, freeing the cash.
Watch out for: The interest cost of the loan goes up. The total interest paid on a 15-year loan is 60% higher than what is paid on a 10-year loan.
STRATEGY 2 Convert to a step-up loan
The impact: EMI comes down in the initial years, freeing some cash for the borrower. After a few years, the EMI increases progressively.
Watch out for: The interest outgo is higher because your principal does not reduce. Also, the EMIs later in the term are higher than in a normal loan.
STRATEGY 3 Foreclose loan and sell the asset
The impact: Eases liquidity crunch for the borrower. Proceeds from the sale can be used to repay other debts and for living expenses.
Watch out for: Distress selling in a depressed market usually does not fetch a very good price. If you sell a house that had been rented, there would also be a loss of income.
(http://in.finance.yahoo.com/insurance_basics/10/how-to-adjust-to-the-downturn/)
No comments:
Post a Comment