New rules of personal finance: How COVID has changed income, spending, saving, investing

In the new world, across segments, income has vanished, reduced or has settled at a new low. The risk to income means families have learned to cut back on spending. Saving and investing are in the background as activities that represent a forgotten luxury.

By Uma Shashikant

As we switch from fear to a gradual state of restart and hopefully even recovery, the questions about family finances after Covid-19 are stark. The going is too tough for some families and easy for the fortunate. However, the recast view of income, spending, saving and investing is tough to miss. These four pillars of household finance have changed drastically.

Risks to income are the most significant. The migrants struggling to get home have lost their livelihood. It is unclear if they will find work in their villages; it is unknown if there are better times ahead when they will comfortably travel back to cities for jobs. Millions of livelihoods have been wiped out by one pandemic. Our gross insensitivity to the shame of displacing millions without work, food and water, and letting them walk thousands of miles, is a black mark we cannot erase from our collective conscience.

The next rung of wage earners who have made the cities their home are still around, but do not have jobs. Many employers who funded the first month of pay are now reluctant to extend the benevolence. Without economic activity, there is no work and no pay; nor do these households have enough savings to keep going without income. They are surviving on hand loans and pledging the few things they have accumulated.

Among the more comfortable monthly income earners, many have lost their jobs; many have settled for significant pay cuts, and hope to hold their jobs; and many others are unsure how the work from home situations will extend over time. The children are at home, with no hope of schools reopening. There are no summer camps, day care or play date. Either parent or a family elder must be present to take care of them and supervise their online studies. This reduces hours of work the family can put in outside their home, if restart begins.

Those who ran businesses have no income as the businesses are closed. Stocks remain unsold; bills remain unpaid; without buyers there is no revenue. From big businesses to small ones, there is an unbelievable standstill. No one would have expected to operate, if at all, at single digit capacity. When the first quarter numbers for this financial year come in, despite all expectations, the shock will be unbearable.

In the new world thus, across segments, income has vanished, reduced or has settled at a new low. Keeping the job and hunkering down to doing it as best as possible, is the most we are looking at. This means demand for credit will have to increase sooner than later. The loan may be unsecured, or against assets that the more wealthy have accumulated, but as the liquidity reserves dry up, the demand for loans will move up. Banks and NBFCs have enough liquidity at this time and should be able to provide short term finance. Without economic activity they cannot go too far. Which is why the lack of government spending, and the lack of bold reforms that place money in the hands of people, sting.

Spending has changed dramatically too. The risk to income means that families have learned to cut back on a lot of expenses. Incurring no expense on eating out, entertainment, travel, clothes, furniture and home décor, is the new norm. Beyond grocery and utility bills, most households are postponing expenses. This is needed given risks to income.

The business impact of this lack of spending is deep too. Without consumption demand, most businesses that thrived on the spending habits of the household will bleed. The ability of these business to employ people, pay salaries and expand activity will be curtailed, creating a negative spiral of loss. Households might be willing to support local businesses and be valiant about using newer unbranded suppliers of goods and services. But the consumption basket has shrunk severely. Credit card usage is down, so is online shopping.

Saving and investing are in the background as activities that represent a forgotten luxury. Households that are still managing a surplus have allowed the money to remain in the bank; and those that have enough wealth to consider investing strategies are quite sure they have not seen the bottom of the falling markets.

Much as we like to stay positive about the new world that will emerge, signs that there would be a gradual and prolonged recovery is all around us. Until a cure or a vaccine is found, we may not be able to claim victory over this pandemic. We may restart with care, but the economic activity can only be a small percentage of what it was; we may step out, but only do so when needed; we may spend, but we may restrict it to only the essentials; and this is how the world might work, at a fraction of its economic capacities, for another 12-15 months before everyone is vaccinated.

How prepared is the household finance for that possibility? Use the experiences of the last 60 days to evaluate how your financial life will pan out. Make a list of questions and take stock for the next 12 months. Is there money in the bank to cover basic costs for that period? What happens if one or both wage earners of the household lose their jobs? How much of a pay cut can be taken? What is the source of liquidity if the job is lost? How can one raise loans? What assets are available to sell or pledge? What are the loans already due to be paid? How does one renegotiate the EMIs and dues?

It is good to know that the air is clean, the rivers are sparkling and that the mornings are filled with bird song. Will this crisis take us back to the very basics, and lead us all to living with content in our communities, focusing on food, rest and family? We might contemplate that fundamental truth about living, but that level of frugality might be unrealistic for most.

Between the mindless excesses of unbridled consumption, growth, and expansion and the rigid frugality of minimalistic existence, lies a mean that we may not be able to choose or pursue. The next 12 months is about that exploration that might define the new character and culture of the household.

(The author is Chairperson, Centre for Investment Education and Learning)

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