Loss of employment is a difficult period for salaried individuals and their families, but suitable financial planning can limit the impact
BEING fired from a salaried job is new phenomenon in India. Till a few years ago, a salaried job with even a mid-size firm was for lifetime unless the employee quits to pursue greener pastures. Things have changed dramatically with the advent of the service-oriented jobs in the so-called new economy and the Indian economy hinged to the vagaries of the global market.
Now a professional faces the prospect of a short-term break in his/her carrier due to challenging economic environments such as the current volatility in the world economy. While one cannot do much to avoid a job loss other than working hard, a well laid out financial planning may go a long way in mitigating its impact.
Not long ago, the salaried class in India had been used a benign job market and near permanency of jobs. The picture, however, has changed over the past 10 years given the increasing number of job opportunities in areas of IT and IT-enabled services like call centers, BPO, and KPO, and other sectors such as media and entertainment, aviation and hospitality.
For instance, during the economic slump of 2008-09, companies, mainly in export related businesses, had to reconfigure their workforce to address the falling demand from the US and European markets. This pushed a portion of their headcount into a temporary jobless phase. The situation was similar in the fields of financial research and investment banking, print and electronic media and gems and jewellery.
No doubt, the present day employment is following the crests and troughs of global business cycles more closely than before. This makes it necessary to plan for such an adversity well in advance. According to the financial planning experts, the opportune time is now. Disciplined investment and savings pattern from the start of a person's working life is key to building financial security, and to ensure adequate funds during the loss of employment.
WHAT'S YOUR BUDGET?
During the loss of employment, a person needs to quickly adjust to a different set of challenges. While the regular inflow of money in the form of salary disappears, many of the essential expenses, such as monthly rent or interest on home loans, insurance premium, food and laundry expenses, medical expenses, etc will still remain.
To get an exact sense of such expenses, one needs to draw up a budget, mapping the current monthly income and expenditure. This should include any type of loan servicing and credit card payments along with the available income streams, such as spouse's income, fixed deposit interest and dividend income, if any. Also, don't forget to include liquid assets such as bank savings and current account and liquid fund schemes of mutual funds.
This leads to the next step of generating what financial planners call a contingency fund. Such a fund is crucial in meeting day-to day expenditure and other financial emergencies during the time of difficulty.
THE POWER OF CONTINGENCY FUND
Typically, the size of the contingency fund should be adequate to meet 3-6 months of a family's monthly expenditure, including loan payments. In some professions, which are highly specialized, and it is comparatively difficult to find an alternative employment quickly, financial planners argue for a 9-month contingency fund.
While building the contingency fund, one can start by setting aside nearly 10-15% of the family's monthly income, in low risk instruments like bank term deposits and liquid fund schemes of mutual funds. Remember, this contingency fund requirement is dynamic.
It needs to be reviewed each year to adjust for a possible increase in a family's income or expenditure pattern, or the enlargement of a family due to the birth of a child.
For instance, if a family currently spends Rs 50,000 per month, they would need a contingency fund, that could vary between Rs 150,000 – 300,000. However, if two years later their monthly expenditure reaches Rs 65, 000 due to a bigger family, the contingency fund would need to be a minimum of Rs 200,000.
USE SEVERANCE PAY JUDICIOUSLY
A laid off employee in the organised sector typically receives 3-6 months of severance pay. In absence of a contingency fund, such a windfall cash flow would find its use in meeting day-to-day expenses. Experts warn against such uses of severance package.
Financial planners say that if proper financial planning has been done from the beginning, the severance pay could be utilised to reduce outstanding loans, such as car or credit card loan. This will take away some burden from the monthly family budget since these loans typically have a higher rate of interest than a secured loan, like housing.
BE PRUDENT WHEN YOU SPEND
Young employees with lesser work experience may see their jobs vanishing faster than their experienced counterparts during a slowdown. Further, such relatively new employees may have lower contingency funds at disposal due to lesser number of years into service.
Hence, it becomes all the more important for such individuals to limit their credit driven expenses. Lesser the burden of personal loan, lower will be pressure on contingency funds during testing times. Conserving cash is key during such a difficult time. Individuals also need to eliminate unnecessary expenditure to balance their monthly budget."
SEEK HELP OF YOUR CREDITORS
A senior executive at the country's leading home loan company said that the lender should help the client jointly analyse his monthly cash flows and various financial liabilities if he has lost his employment. Based on this exercise, if possible, it advises the client to pre-pay more expensive debt including personal, car and credit card loans to reduce the burden on the monthly family budget. Loss of employment is a difficult period for individuals but suitable financial planning in advance can help limit the impact.
