In the last article India’s strengths in the current situation when concerns of recession are discussed globally were covered. Does that mean investors can relax ignoring the recession concerns?
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Recession and many such predictable and unpredictable global and domestic factors can impact any economy and markets. Covid kind of unprecedented happenings has also come across our life span strongly telling us how grievous uncertainties can be.
The age-old saying “Prevention is better than Cure” is better to be practised when it comes to Finances regardless of whether or not India gets vulnerable to recession.
The impact of a recession financially can be a slump in businesses, reduction or loss of income, inflation leading to high prices, high cost of borrowing, high EMIs on floating rate loans the most impactful being home loans for individuals, delay in achieving financial goals etc. It is important for everyone to ensure their financial portfolio is recession or uncertainty-proof.
If your finances need to be guarded against uncertainties, a few basics are given below need to be ensured at all times.
- EMI payments towards loans should not exceed 40% of the income
- 6 months’ salary should be kept as a contingency fund
- House rent should not exceed 20% of income
- One should save and invest a minimum of 20% of income every month
- Health insurance of a minimum of 5 lacs
- To have Term life insurance of 10 times of annual income
The first 3 thumb rules given above are to ensure that your liabilities are under control and wouldn’t bite you to go out of pocket in any circumstances.
Though we are not under recession now, there is already a pinch to loan customers who hold floating rate loans due to interest rates which have been hiked 4 times post-Apr 2022 by a total of 1.9%. To give an accurate picture let us take the case of a 20-year home loan taken in Apr 2019 when interest rates were 6.7% which was to mature in Mar 2039.
As the revised interest rate now would be 8.6%, if the loan tenure has to end at the same Mar 2039, then the EMI will go up by about 13%(If EMI were 50,000 earlier the revised EMI would be about 56,500). If the EMI amount hasn’t been increased, then the loan tenure will extend by over 5 years and end only in May 2044.
Imagine such a tenure extension in the case of someone who had planned to have the tenure ending at the age of 60 when he will retire and the pain such an extension would cause, particularly if he is walking a very tightrope with no surplus left after liabilities and expenses.
So, such uncertainties always are part of our financial journey and only those with adequate savings and investments can tide over without difficulties.
The last 3 thumb rules(4-6) are to protect the self and the dependent family from uncertainties that may give a financial shock. Investments would enable building a sizeable corpus to resort to when required during the earning years and during the retirement phase.
Health Insurance would safeguard one’s wallet from unexpected medical expenses. Term Life Insurance gives financial protection to the family in the unfortunate event of the demise of a person.
These financial disciplines would give the necessary balance between wealth creation and protection from uncertainties.
Keeping one’s family’s economy in order and uncertainty proof is what one should focus on at all times. If this is taken care whatever turbulence the national or global economy would encounter may not shake you much.
So, whether or not recession affects India, take this as an opportunity to check if the above-mentioned financial hygiene parameters are in order in your family and if not get them corrected to make your finances recession or uncertainty-proof.
V.Krishna Dassan, Director -Wealth Management, Dhanavruksha Financial Services