Managing your finances in uncertain times

Once every few years, there arises a situation when everything around us looks challenging and uncertain. A fragile economy, unemployment, negligible pay hikes, cuts in employee benefits, rising cost of living trigger financial disruption in many people’s lives. We are undoubtedly going through economic and geopolitical volatility, and if it is telling on your financial situation, you are not alone.

If you are struggling with your finances, your financial goals may feel completely out of reach. In such a scenario, having a financial plan comes in handy. While you cannot control every aspect of your financial life (see Mind Games), you can manage several elements that can take care of your needs. Focus on what you actually have power over in your financial plan. Setting financial goals, if not already done, is your blueprint to a secure financial future.

In the very long run, spanning decades, despite changes in governments, wars, technological advances, discoveries and more, the stock markets have eventually risen. Instead of focusing on unpredictable events, you should concentrate on what is in your hands, which means continuing to save with a clear savings plan and to invest with proper diversification. Have financial goals for the short, medium and long term, with an investment strategy for each. Depending on your stage in life and financial goals, you will have some savings and investments. Make a start by reviewing your existing financial progress.

FINANCIAL REVIEW

Having a financial plan is no longer a one-time exercise. There are far too many variables affecting your finances for you to afford not to revisit your plans at least once a year, and sometimes more. For those who think managing money is about paying bills on time or sticking to a budget, think again. Financial planning is about understanding the full picture of your financial life and making choices that set you up for success. Think of a financial plan as the roadmap, and the review as the periodic health check-up that you undergo.

It is a comprehensive look at everything that impacts your financial well-being: income, expenses, savings, investments, debts and even insurance coverage. A solid financial review with an expert will help you recalibrate where you are today and where you want to go by examining your current spending and saving habits to establish the baseline for your plan.

HOUSEHOLD BUDGET

Start by re-categorising your budget to know where the money is going. If your income has gone down, you will not be able to budget your money the same way that you have been doing for a long time. There are several expense-tracking tools, including insights from your bank account in their app, which can help you get a sense of your spending.

Having a budget is crucial for a smooth financial journey. Once you allocate your expenses across heads, you will be able to see where you are spending more and where you have scope to cut down. A blanket cut in expenses is only a temporary fix. Revisit your budget every month to refine it, identify essential expenditures, and regularly cut all other expenses where there is room to do so.

REVISIT FINANCIAL GOALS

Revisiting your financial goals during times of uncertainty is all about regaining a sense of control. It is a moment to prioritise goals in light of changes to your financial situation. You can reinforce your emergency fund, try to pay off high-interest debt and re-assess your risk tolerance. By undertaking this exercise, you will know how far you have progressed in achieving each financial goal, such as retirement, a child’s education or even home loan repayment. By revisiting your financial goals, you can adjust expected investment returns, factor in inflation changes, and compare them to those you assumed earlier.

The revisit exercise is an opportunity to ensure that your investments remain aligned with your risk tolerance. Moreover, just because money seems to be tight, it doesn’t mean you need to abandon your financial goals. You may consider taking on additional work to supplement your income, or working for a few more years and postponing your retirement. You may also sell some of your unwanted, yet valuable possessions to reduce debt or increase investments. You may delay certain goals; however, non-negotiable goals should not be tampered with. Your child’s college education is a non-negotiable goal, and you cannot change the year when they finish school to enter college.

However, you can delay goals such as upgrading your car or travelling abroad for a vacation. The goal-revisit exercise allows you to juggle the limited monies you have to invest towards each of your financial goals. Ideally, a well-crafted financial plan doesn’t require much tinkering. However, given the extended climate of uncertainty, a little flexibility around your goals will prepare you to face other financial challenges that life may throw at you.

DECISION DILEMMA

Don’t be burdened by trying to make many financial decisions at one go. Instead of aggregating allocations to expenses and investments, consider financial commitments individually. Try tackling them one at a time and stagger your decisions on addressing the issues. Emotions play a vital role in our lives, and they easily influence us. People are known not to touch investments made in their children’s name or their spouse’s name.

Emotions are neither good nor bad, and it is impractical to be emotionless—rather, it is important to understand the emotions driving your decisions. Be clear about where your feelings are coming from, so you can look at things as realistically as possible. Remember that emotions may be temporary, but the emotional impact of your financial decisions can be permanent or difficult to change. When it comes to financial decisions, it is better to consult with an expert who will not let your emotions harm the financial decisions you make. Emotions can lead to anxiety, which is fast impacting lives (see Coping with Financial Anxiety, below).

STAYING INVESTED

When market conditions are uncertain, or market returns aren’t as impressive as you had imagined, it is natural for you to be worried. Although history shows that time is on the side of the long-term investor, not everyone has time, nor does every goal. Take, for instance, someone approaching retirement in 2027 with a significant retirement corpus invested in equities. It is for these reasons that it is important to take the long view and trust the financial strategy built around your risk tolerance, time horizon and goals.

A well-diversified portfolio, with a balanced mix of investments and asset classes, can also help lessen the risk of loss against prolonged market volatility. Volatility is an investment term for periods when the stock market experiences unpredictable, and sometimes sharp, rises and falls. Volatility is caused by a wide range of economic and political factors, from news affecting a particular industry sector to government policy changes and political tensions or upheavals. Anything that creates uncertainty and prompts some investors to sell while others buy can lead to volatility.

In a volatile market, prices are not always an accurate reflection of real worth. A sudden swing up or down can cause an investment to suddenly seem worth more or less than it really is over the long term. Although people often think of volatility only in terms of dramatic stock price drops, it can also refer to sudden rises. So, it is really just a way of describing a market that’s going through some turbulence (see Volatility is Normal, below).

The best way to cope with stock market uncertainty is to follow time-tested investing principles of asset allocation, diversification and rebalancing. You may be tempted to rush into buying or selling stocks, either to ride a wave of growth or minimise your losses. Keep your emotions in check and follow the advice of a few well-known, proven experts when making decisions. Follow a disciplined approach, such as investing in mutual funds through SIPs, which has proven to benefit investors.

Moreover, there are mutual funds suitable for different time frames and, in turn, financial goals. You can align your investments with your goals. You can also pause or temporarily stop your SIPs when you are very uncomfortable. With a clear investment review frequency, you can evaluate how your investments are faring. Historical data suggest that while most markets will experience periods of short-term volatility, they will, over the long term, maintain a steady upward path. Though past performance is not a guide to the future, staying invested can help capture as much growth as possible from the market.

Stock markets are ever-evolving and globally interconnected, and changes in policy and taxation laws can impact their performance as much as shifts in currency exchange rates. Likewise, your risk-taking ability may have gone down over time. Understand these changing realities and find your comfort zone. Taking on investment risk doesn't need to follow an all-or-nothing approach. Risk is unavoidable, but managing risk is possible.

There is a lot of innovation and change in the financial industry and in regulations. Learn to stay up to date on some of these changes, especially those that will impact your life. While it is important to stay informed, constantly checking the news or watching daily stock market movements often leads to emotional decision-making.

Develop financial flexibility to move your money easily and access it when you need it. Use the digital medium and platforms that allow you to access your savings, investments, insurance and other financial instruments to have full control over. When your financial accounts work seamlessly in the background, you feel more prepared for whatever comes next.

COPING WITH FINANCIAL ANXIETY

The increase in the cost of living is leading to more financial stress, impacting not just finances but also mental health

There is no shortage of anxieties these days, but more and more adults are facing uneasiness about finances. Worrying about not having enough money to pay for certain things is just one thing, but thinking about money in general causes anxiety among many individuals. Changes in the economy can affect people in different ways—while one may feel the pressure of rising prices, another may worry about job security, savings or debt servicing. Even when nothing has gone seriously wrong, the climate of uncertainty can still create stress.

If you are the sort who wakes up in the middle of the night because of a money-related panic attack, you are not alone. The paycheque-to-paycheque life is making it hard for many people to focus on other aspects of their lives. It is affecting their sleep, focus at work, relationships, and even leading to their inability to speak to people around them. The strain shapes the choices they make with money, sometimes making things harder. Understanding financial anxiety is a good first step toward managing it. Financial anxiety is often vague and unrelated to any tangible factor, yet it impacts your well-being.

Don’t confuse financial stress with financial anxiety. Financial stress is not having enough money for something specific. Financial anxiety is an emotional response to your financial situation. For instance, you may be earning perfectly decent sums and managing your home loan repayment, yet you may worry over a future increase in EMIs. You may also fear losing your savings because of an unexpected medical bill or news about wars. You develop financial anxiety mostly because you fear not having the resources available to meet your needs or face challenges that lie ahead.

The answer to managing financial anxiety goes beyond simple budgeting tips and has more to do with addressing the root causes of these complex emotions about money. Sharing some of your financial concerns with a trusted friend or family member can lighten the emotional load you are carrying. Doing so prevents you from feeling alone in managing the issue and also makes the person aware of your anxiety. There are financial therapists as well as financial planners who can help you overcome it. Don’t let your financial anxiety turn into a full-fledged mental illness, which is more difficult to overcome.

VOLATILITY IS NORMAL

Volatility in investments occurs when the stock market experiences periods of unpredictable and sharp rises and falls. Stock market volatility is inevitable and an indicator of a healthy stock market. In the long term, market indices experience fluctuations for various reasons. The price of individual stocks goes up and down over time to reflect the business’s changing relevance and the impact of government policies and taxes on it. The fortunes of companies like ACC and Dr. Reddy’s Laboratories have fluctuated, leading to their exit from the BSE Sensex composition over the years.

There are many other examples that one can come across in the stock markets. It is important to be comfortable with the idea of seeing the market change. Volatility is caused by a wide range of economic and political factors, from news affecting a particular industry. If you are prepared and ready for volatility at the beginning of your investment journey, then you are less likely to be surprised by short-term market events and more likely to stay focused on your long-term goals. Engaging with seasoned, expert investors can help you understand volatility and how to cope with it.