We are in the midst of an economic slowdown for sure. The west is down to growth rates of 0 and 1% per annum. Dropping oil prices will mean Sovereign Funds will have lesser monies to spend, and IT companies will also bring in lesser revenues.
When the going gets tough, the tough go shopping! So you have Warren Buffet going shopping and picking up monies for buying options. Well you are not in that privileged class of investors, are you? Frankly I do not know of many such people even in the Indian scenario!
However this article is not about Ben Bernanke (who owns a printing press, so can make money) or Warren Buffet (He knows how to earn money with money as the raw material). This article is about every Joe, Harry, Smith or Radha, Shama, or Mridula.
In tough economic times, people are sometimes left scrambling for cash to meet everyday expenses and lifestyle demands. Salaries may be lowered or stopped or it may take some time to come. I just heard of a small shipping company which has not yet paid salaries for the month of August!
So what does the common man do? The normal tendency is to turn towards “assets” which were created just for such a day. Let us look at the tempting options which people look at:
1) Postpone paying the life insurance premium: You have just received a notice from your life insurance company, and you are tempted to ignore it. Do not do it. Revisit the reason for taking the policy. If you took it as a protection need, have the conditions changed? If not continue the policy. DO NOT LET IT LAPSE. However, if the policy is an old one, it would have acquired some “paid up” value, try making the policy “paid up” and stop paying further premia.
2) Stop the SIPs: If you have been investing for your children’s education, your own retirement, buying a house, etc. and this money is growing towards that goal, stopping it does not make sense. However, if you have to stop BECAUSE YOU HAVE a cash flow crisis, you should stop. However, you should not stop it because the markets are down.
3) Using your credit card and letting the debt run: This is another suicidal thing to do. Do not let your credit card bills run – at 42% per annum interest paying of your credit card in full should always be a top priority.
4) Borrowing from your PPF: is a good option because it comes at the least cost. It just your money which you are withdrawing, so if you MUST access money, let it be from your own PF, PPF or premature withdrawal of your national savings certificates.
5) Loan from your Life Insurance Policy: If you have old (classic) endowment or money back policies you will be able to get a loan against those policies. However, in such a case you need to remember to take a term life insurance policy to the amount of the loan. As an example let us say I have an endowment policy worth Rs. 30 lakhs. I think my family needs that much money if I drop dead. So if I do take a Rs. 20 lakh loan (for what ever purpose) I should IMMEDIATELY take a term life insurance for Rs. 20 lakhs.
However, what you must do are the following:
1) Check your credit card statements – look for life style expenses that can be cut down.
2) Check your investments – try getting rid of the duds – even it means taking the losses. You are only acknowledging what your heart already knows.
3) Downsize some non crucial goals – vacation locations and size of car can surely change.
4) If you have signed up for services that you are not using see if you can either cut it off or get some money for closing it.
5) Look around your house and list those things which you bought when you had the “feel good” factor because of you Rs. 20 million net worth! Keep the list for all to see! Next time you go shopping read the list and then make the trip – it will keep you frugal!
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