Facing job loss or pay cut? Here’s how you can stay financially prepared

The spectre of layoffs continues with many tech majors, e-commerce firms, semiconductor companies and start-ups, among other global companies, shedding people at work. Rising interest rates, dwindling investors in start-ups (funding winter) and a declining world economy heading for a recession have resulted in an uncertain work environment where you can’t be sure when the axe will fall on you.

If you work in a job or an industry that is facing the heat currently, it would be advisable to stay prepared for bad news of pink slips or pay cuts.

Here are a few key points to help you stay resilient from a financial standpoint even in the face of adverse events.

Have a large contingency fund

Irrespective of whether the going is good, and more so during difficult economic conditions, saving up for an emergency fund is critical for any financial planning to be successful.

In fact, having a contingency fund should be your first priority immediately after you enter the workforce or at least within the first few years. All investments that you wish to make with your surplus should start only after your emergency fund is in place.

How much should you save for emergencies? There are no defined figures. But higher the amount, the better. It should, at the minimum, cover the period that you think it would take to find a new job.

Ideally, you should have 6-12 months’ worth of expenses, EMIs (equated monthly instalments), insurance premiums (term and health) and investments. If the figure is, say, ₹1 lakh a month, you need to have at least ₹6 lakh to ₹10 lakh as contingency fund.

We have added investments to make the corpus calculation more conservative as you can continue saving for life goals uninterruptedly.

Expenses should include all grocery bills, utility payments, children’s school fees and any other miscellaneous cost heads.

The amount may appear daunting, but it is critical that you accumulate it over a period of time, but reasonably early on. All large sums can disappear before you realise, in the absence of regular income inflows.

This emergency fund can be retained in your savings account or in a liquid or money manager fund. The idea should not be return maximisation, but just safety and easy liquidity.

Also, once you re-join workforce, you must replenish the emergency fund.

Having own insurance covers

Irrespective of whether your company offers a health cover or not, you must take an independent policy for yourself and dependent family members.

Remember, when you lose your job, your company’s health insurance policy also stops being available for your needs. You must take a personal health insurance covering your spouse and children. In case you have dependent parents or if they do not have their own medical policy, you must also add them in your health cover. Otherwise, if they face any medical conditions or emergencies, you would be forced to dip into the contingency fund unnecessarily.

You must also have your term cover in place. Adding accident and critical illness riders to your health insurance policy would also be a good idea to take care of any extreme contingency events.

Budget carefully, conserve cashflows

In the best of times, credit card dues and personal loan EMIs can land you in a debt trap if not repaid on time. It will also hurt your credit scores.

Much before a job loss or pay cut scenario plays out, you must take control of your debt situation firmly. Repay all your dues on time and do not use your credit card or take any fresh loans, at least till you find a new job.

Go back to the budgeting process and mercilessly trim non-essential cost heads for the time being. You are likely to have savings on fuel costs and the like.

Seek flexibility in certain payments. For example, if you are in the habit of paying the full-year’s fees as your children’s school gives a discount for such payments, you can do a rethink.

Most schools also allow term-wise fee payments. Take the option so that you are able to conserve cashflows.

One other step you can take is to sell all your dud investments to shore up cashflows. So, you can surrender expensive endowment or moneyback or even ULIP policies if the minimum lock-in is over.

Unlike in the West there is no social security payment in case of a job loss. There isn’t a developed market for job loss insurance either.

Therefore, you must follow these basic steps to avoid financial mishaps.