Start by settling all accounts with the employer. “Verify that provident fund, gratuity, retirement-related payments and other amounts due are received on time and in the correct amount,” says Renu Maheshwari, Sebi-registered investment advisor, co-founder and principal advisor, Finscholarz Wealth Managers. Also assess the tax implications of the cash flows received on termination.
Next, estimate the household’s minimum monthly expenditure. List unavoidable expenses such as rent, groceries, transportation, education and medical bills.
“Do not restrict the exercise to monthly bills. Include annual expenses falling due over the next 6 months, including health and life insurance premiums. Other bills and subscriptions necessary for day-to-day functioning should also be factored in,” says Maheshwari.
Once the expenditure estimate is ready, take stock of liquid and relatively liquid assets. These could include bank balances, fixed deposits, liquid funds and debt mutual funds.
Compare the available financial resources with monthly expenditure to estimate how long the money can last. “For a more conservative estimate of the financial runway, rely primarily on fixed-income assets such as fixed deposits and debt mutual funds. Equity mutual funds are less dependable for this calculation because their value depends on market conditions,” says Maheshwari.
Cut expenses selectively
Discretionary spending should come down after a job loss. Vacations should generally be postponed or cancelled. Purchases of luxury products and spending on upgrading or furnishing the house should be postponed.
Dining out, movies and similar entertainment expenses should be reduced, though not eliminated completely. Their frequency can be cut depending on the household’s financial position.
“Avoid taking austerity too far. Excessive spending cuts can compound the psychological stress caused by unemployment,” says Maheshwari.
When using savings to meet expenses, dip into the emergency fund first. Fixed deposits come next, followed by debt funds.
Retirement savings should be protected and used only in extreme situations. Prematurely exhausting money meant for retirement can create a much bigger financial problem later.
Equity requires a more nuanced approach. It can be liquidated selectively depending on market conditions. “If markets are favourable, investors may book some profits,” says Maheshwari.
Pause SIPs, change asset allocation
Systematic investment plans (SIP) that were funded from the monthly salary will have to be paused until another job is secured or another regular income stream is developed.
Asset allocation also needs to change. “The investor’s capacity to take risk falls drastically, so portfolio risk needs to come down,” says Maheshwari.
This does not mean exiting equities completely. Maintain an asset allocation appropriate to the changed financial circumstances rather than making decisions based on fear and panic.
Protect critical repayments
When cash flow becomes strained, the payment hierarchy should be based on the consequences of default rather than only on the interest rate.
“Among debt obligations, secured loans such as home and vehicle loans generally warrant priority because they are linked to underlying assets,” says Vinay Singh, co-founder & chief product officer, Olyv.
At the same time, high-interest debt, particularly credit-card dues, needs early attention because the outstanding amount can grow rapidly. Protecting the credit score should remain a key concern.
Control credit card debt
At the least, pay minimum dues on time to prevent an adverse impact on the credit report. However, this is not a solution: the account may remain current but the outstanding balance will continue to grow rapidly.
Credit card revolving interest can be 36-45 per cent a year. Where feasible, convert the outstanding balance into a structured EMI plan. “Many issuers offer such conversions at 12-18 per cent,” says Ritesh Srivastava, founder & CEO, FREED.
Act before missing a payment. “Once there is a default, issuers may tighten terms or not offer conversion,” says Srivastava.
Approach the lender early
If an EMI is likely to be missed, contact the lender before the due date. “Early engagement improves the possibility of reaching a workable arrangement without damaging the borrower’s credit score,” says Singh.
Banks and non-banking financial companies (NBFCs) may offer restructuring in cases of genuine hardship. “The options could include a moratorium of three to six months or an extension of the loan tenure that reduces the EMI by spreading repayment over a longer period,” says Srivastava.
Health insurance should be treated as an immediate priority after a layoff. Find out exactly when the employer’s group health cover ends and begin exploring alternatives before there is any break in coverage.
“Under Insurance Regulatory and Development Authority of India (Irdai) provisions, migration from a group health policy to an individual or family floater policy with the same insurer is available,” says Arun Ramamurthy, co-founder, Staywell.Health. Migration can help preserve continuity benefits accumulated under the group policy.
Contact the insurer or third-party administrator (TPA) and request migration before the employer’s group cover expires. “Check the terms, premium and sum insured of the new policy. Also confirm which family members will be covered, what continuity benefits will be recognised, and which waiting periods will apply,” says Ramamurthy.
Do not assume that the replacement policy will mirror the employer-provided cover. An individual policy may offer different benefits and can be significantly more expensive. “Migration is also subject to underwriting, making existing medical conditions an important consideration,” says Ramamurthy.
Pros and cons of restructuring debt
• Restructuring can take the form of a moratorium, or a longer repayment tenure
• A moratorium (pause in payments) offers immediate relief
• But interest continues to accumulate during the payment holiday
• A longer repayment tenure lowers the EMI and hence eases the pressure on monthly cash flows
• But the total interest outgo over the life of the loan increases
• Some lenders also charge a processing fee of about 0.5-2 per cent of the outstanding amount for restructuring