As we get into the second quarter of 2021, life seems to have come full circle, as they say, and we seem to be well into a 2.0 version of last year. But just a few weeks back, the memories of 2020 and the troubles wrought by the pandemic seemed distant and fading.
Life had more or less returned to normalcy in most parts, and people seemed to be mingling as though social distancing was a bad dream.
While the memories of last year seem short-lived, I have a different view on this — keeping the experiences of the last 12 months alive in our memories and better still, taking actionable insights from it to prepare for the future, may be one way of being safer and more secure in a future increasingly turbulent and uncertain. So, as we go into a vicious relapse, it may be prudent to quickly assess how each one of us fared during those stressful times.
Most of you would have heard of a “Stress Test”. In personal health, a stress test assesses the state of your overall fitness and particularly your heart. Simply put, a stress test simulates the health and strength of any system that you wish to test, through appropriately designed procedures. Similarly, one can design a stress test to check how prepared one is financially to endure a financial crisis, like what happened in the last few quarters.
Answering this simple six question test below will be a rudimentary yet effective way to check how healthy your personal finances are.
During the last 12 months, many people either faced pay cuts and even worse, job losses, which has caused significant impact to their cash flows and future plans. Did you have to take a greater than 20% pay cut in your job, or even worse, lose your job?
I didn’t face a pay cut or job loss
I faced only a pay cut, but didn’t lose my job
I lost my job
You would have seen people near you, or even worse, even yourself or within family impacted by COVID. Did you have inadequate/no health insurance for you and your family? Even if you did, did you have your personal health cover or only that provided by your company?
I have adequate personal health cover
I only have company-provided health cover
I don’t have any/adequate health cover
Truncated salaries and insufficient savings led to cash shortfalls among many, and they had to raise funds to manage their expenses. During the pandemic months, could you avoid liquidating any long-term assets/investments (eg. withdraw from EPF, long-term FDs, equity or long-term debt mutual funds, etc) to tide over cash shortfalls? Even if you did not have to liquidate, did you have adequate provision (at least six months-worth of expenses) for the same in case of any such eventuality?
I have 6 months of expenses kept aside as emergency provisions and did not have to liquidate any investments
I did not have provisions but didn’t have to liquidate
I had to liquidate some investments to manage my expenses
Even in good times debt is a drag, but in bad times like 2020, it can be a killer. Were you carrying debt that needed to be repaid in the form of monthly EMIs? Worse still, was some of it short-term unsecured debt (personal loan / credit card)?
I don’t have either long-term or short-term loans
I have only long-term secured loan (house/car)
I have both or only short-term debt
Millions across the world have lost their lives to COVID-19 and as a result many of the affected families face an uncertain future. Did you have adequate life insurance (pure life cover) to cover key future goals of your family (wife, children, dependent parents)? Even if you don’t, do you have enough investment assets that will take care of those goals adequately?
I have adequate life insurance to cover my future goals
I don’t have enough life insurance but have some assets to fund my goals
I have neither enough life insurance or assets to fund my goals
COVID-19 brought a new term into our lexicon – “co-morbidities”. You may have not been personally or financially impacted by the pandemic, but do you have lifestyle diseases like diabetes / high blood pressure? Even if you fortunately do not, are you over-weight for your age/height (BMI over 25) and largely have a sedentary lifestyle?
I don’t have co-morbidities and have an active lifestyle and am not overweight
I don’t have co-morbidities yet but am overweight/have a sedentary life
I have co-morbidities as described above
Use the below key to understand how fit your personal finances are.
For every “a”, give yourself 2 points, for every “b”, 1 point and for every “c”, 0 points. The max you can score is 12 and minimum is 0.
11-12 – Well done, you are financially quite healthy, and definitely among a minority
8-10 – This is good, you seem to have some areas under control and some discipline can help you cross the threshold into good financial health
0-7 – This is worrying, you do not seem to have your finances under control. You need to take some drastic steps immediately to improve your financial health
So, how did you fare? I hope each one of you found yourself in a space where your financial health is either good or passable. In case not, what you need to do is answered in the questions themselves. Take prompt action, and take it now, as one never knows when and where the next catastrophe awaits.
(The writer is an NISM-certified investments practitioner and co-founder of Finwise Personal Finance Solutions)
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