scorecardresearchWorried about layoffs? Here are five effective ways to prepare your finances

Worried about layoffs? Here are five effective ways to prepare your finances

Updated: 18 Nov 2022, 10:36 AM IST

Sudden unemployment can leave you fiddling for money. The inability to pay your bills on time can take a massive toll on both your finances and mental health.

Sudden unemployment can lead to unforeseen financial stress

Sudden unemployment can lead to unforeseen financial stress

The past few weeks have been of many people sharing how they were laid off suddenly by their employers. Whether Wipro, Byju’s, Meta or Twitter, social media channels are flooded with sympathy posts for people looking for alternative employment following these sudden layoffs. While incidents like these expose the myth of corporate culture being safe and united, it also brings forth the possibility of a financial crisis due to sudden unemployment. 

What do you do when you suddenly lose a job? Do you have enough money in hand to pay for your expenses? Did you start an emergency fund for your family? How much money is there left in the corpus? Is the month enough to pay for the next 12 months’ bills? Do you have an overriding loan too? Is it some high-interest debt that you have incurred? Questions like these and more are evident in people suddenly laid off and are then unable to figure out their finances. 

Even though such situations are unavoidable, the biggest question is what you do to avoid unwarranted financial stress. Does the consequent financial distress worry you or if you have enough money to deal with unforeseen emergencies?

Financial struggle is real, which is why you must be aware of ways to be better financially prepared. These include:

Emergency corpus

It is always prudent to set aside six months to a year's worth of income as an emergency fund. If you lose your job, you can at least rely on this money to get by for the next few months until you find another. Ideally, the funds should be kept in an easily accessible location, such as liquid funds or savings accounts, so that they can be withdrawn quickly when needed.

You must focus on liquidity while planning an emergency corpus. It is in fact the most important factor to consider when deciding where to invest your emergency fund. This is to ensure that you are able to access your funds whenever and however you need them. Simultaneously, you must avoid being penalised by an exit load or a pre-withdrawal penalty. The investment's value should not fall and should provide excellent returns.

An emergency fund is built over time, not overnight. Set aside a certain amount of money in a separate bank account each month. It will quickly grow into the large corpus that you desire. Start with setting aside Rs5,000 or Rs10,000 per month to accumulate the required corpus. To achieve this goal, it is acceptable to reduce your investments.

Health insurance 

There is no bigger fool than you if you rely solely on corporate health insurance. Never rely entirely on the company's health insurance. One major reason for this is that if you lose your job, you are no longer covered by the plan. So, if you have a health emergency while you are not working, you will have to pay the bill out of your own pocket, which will add to your financial stress. As a result, it is always a good idea to get personal health insurance for yourself and your family.

Also, the effect of inflation on health insurance is unavoidable. When inflation is considered, savings instruments with attractive interest rates are insufficient to cover the costs of medical procedures. Health insurance is an important tool that can help you meet your anticipated medical expenses. From the cost of equipment to the cost of treatment, medicines, and diagnosis, health insurance covers a wide range of expenses and helps you overcome the effects of inflation.

Proper budgeting

Because our financial resources are already stretched, it is critical that we examine our expenses and revise the monthly budget. Food, utility bills, EMIs, and other such expenses cannot be avoided. Keep track of these and then decide on your monthly expenses accordingly. A budget in place will allow you to see where your money is going. You can set aside money for bills and expenses and create a plan to achieve your financial objectives. 

To start with, use the frequency with which you are paid as the timeframe for your budget.

Get rid of unwanted expenses

When you have a regular income, you should always set money aside for savings, recreational activities, and discretionary expenses like eating out, going to the movies, magazine subscriptions, and so on. During the current emergency, however, you should try to avoid such expenses entirely. You should also temporarily halt your savings and investments.

The key to spending less money is to make small cuts in each area rather than taking large chunks out of your budget all at once. It may take some effort at first, but you’ll notice a reduction in your financial stress once you're able to save and pay off more of your debt.

Budgeting on a monthly or weekly basis allows you to stay within predetermined spending limits. If you've been working for a while, you'll have a good idea of how much you spend on various things. So you can make a list of major expenses like food, rent, and travel. You will automatically reduce your spending in that category as you approach the limit set for that expense. You can create budgets based on expenses incurred in the last few years - or since you started working - and then stick to them.

Many people follow the 50:30:20 rule to budget their earnings and expenses. Spending 50 per cent of your salary on necessities and 30 per cent on wants allows you to avoid overspending on unnecessary items while also ensuring that some income is set aside for savings.

Do not take loans 

At this time, you must avoid taking on debt at all costs, such as applying for a personal loan or a loan against your credit card. These loans may appear to be a relatively simple way to get out of financial trouble in the short term, but their interest rates are extremely high. 

Personal loans are extremely expensive, so they are best avoided. It is acceptable to take out a personal loan when you have an emergency need, such as medical bills, and no other options. Taking out a loan to meet lifestyle or aspirational goals, on the other hand, is entirely inappropriate. 

There is the strain of losing a job that you cannot dare to ignore. The subsequent stress of finding yourself suddenly unemployed can have a negative impact on your mood, relationships, and overall mental health. If financial problems are not addressed promptly, they frequently lead to more financial troubles. The best way out is to be financially prepared and adept to take on whatever life has in store for you. 

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First Published: 18 Nov 2022, 10:36 AM IST