Create a job loss fund

It should cover mandatory expenses, insurance premiums and loan instalments for 6 months to a year

After almost a decade since the Lehman crisis in 2008, job cuts are again making headlines. Whether it is an HDFC Bank (which reduced headcount by 4,500 in the third quarter) or e-commerce firms like Snapdeal, a large number of companies are pruning personnel consciously to save costs and conserve cash. 

There are a lot of sectors like telecom, information technology and others which are likely to see headwinds due to an uncertain global outlook and consolidation. In India, job cuts get more difficult to handle in the private sector because there are few or no rule around severance pay. “For senior management professionals, severance pay may be three to six months or even 12 months in some cases. However, there is no rule around this and the situation varies across organisations,’’ says Ankit Agarwala, director of Michael Page India, a specialist recruitment firm.

Preparing for a job loss, therefore, becomes paramount. How can one prepare? If you do lose your job, how should you restructure your finances? When faced with such a situation, it is safer to be risk averse with regards to your investment portfolio and your loans, say experts. 

Contingency fund is a must: An emergency or contingency fund is a must for every family. The usual recommendation is to have a corpus that can cover three to six months of mandatory expenses, insurance premiums and loan instalments. 

But, if you work in a sector that is under pressure, it is prudent to increase the corpus to cover one year’s expenses. This corpus should be invested in short-term debt funds, liquid funds or bank fixed deposits. 

“The size of the contingency fund should depend on the seniority level of the employee and the industry,” says Amit Kukreja, a Sebi-registered financial advisor. A junior management employee might be able to find a new job in a couple of months. A middle management employee could take three to four months, while a senior management employee like a vice-president or managing director could take a year or so to find a suitable job. Similarly, someone in aviation could take longer to find another job, while someone in the health care or pharma industry may find a job faster. 

This money (contingency fund) must be taken out only when a job loss happens. “No matter how secure and stable you feel in your organisation, ensure that you don’t take this money out to pre-pay a home loan or to lend to a friend or relative,” says Kukreja. 

Have enough insurance: The contingency fund should cover the annual premium for insurance — term life insurance, health insurance, and personal accident and disability cover. If you own a car and a home, then insurance for these assets should also be part of it. And, you must continue to pay the premiums for these during the job loss period, so that the coverage is not disrupted. 

“If you or anyone in your family is hospitalised during the job loss period, the idea is not to dip into the emergency fund to pay for hospitalisation expenses. So, you must have the maximum health insurance you can afford. In a metro city, for a family of four, it could be Rs 20 lakh,’’ says Manikaran Singal, a Sebi-registered financial advisor and founder, Good Moneying Financial Solutions.

Avoid insurance policies for job loss: There are insurance policies that offer to cover expenses up to three months if you face a job loss. These typically cover three months of salary and three highest Equated Monthly Instalments (EMIs) but come with conditions. Says Deepali Sen, founder, Srujan Financial Advisers LLP: “To avail of the insurance, one should not have lost the job due to non-performance or cheating etc and one should not take up another job for 90 days. Also, it can be used only once. If you lose a job a second time, you cannot use the insurance. So, while it is an option,  it is an expensive product and can be avoided,’’ she says.

Stop investments: It is advisable to become risk averse with your investments and even stop your systematic investment plans (SIPs), if required. “If you have investments like a Ulip, use this opportunity to come out of it. Sell it and take the money out,’’ says Singal. If you are continuing with your investments, reduce the allocation towards equity and increase the allocation towards debt. Once you get another job you can increase your equity allocation. 

One mistake many people make is to look for options to make money quickly. For instance, they may invest in stocks which promise quick returns in short period and higher dividends. But such investments are best avoided, Singal adds. 

Review your loans: You must continue paying EMIs on your loans. “Don’t even think about pre-paying loans during the job loss period. But if you cannot afford to pay all EMIs, review them based on the term of the loan. Extend the EMI period if you find it difficult to re-pay,’’ says Kukreja. 

Credit card loans or personal loans are the ones that must be repaid as they are more expensive. The penalty on delayed repayment is high in case of credit card loans. You can discuss with your bank for a moratorium on your home loan. But the bank will allow this only on a case-to-case basis, says Sen. 

Don’t fall for marketing pitches like taking a personal loan and using that to repay other loans. Singal recounts the example of one of his friends who was faced with a situation like this. But when he did the calculations, he found that the EMI for the new loan was higher than those for the existing loans. Besides, the existing loans had tenures of two years, while the new loan would take six years to repay. 

Reduce discretionary expenses: While mandatory expenses like EMI, insurance premium, household expenses, children’s fees must continue, one must reduce discretionary expenses like vacations or doing up your house interiors, etc. Reducing lifestyle expenses is difficult. But it is a must when faced with a job loss.