When 2020 started, little did we know that by March the entire country would be locked inside their homes. This situation has undeniably highlighted the unpredictability of life and the need to evolve with changing times to survive and grow.
In this unprecedented situation, some people have experienced a salary cut or a job loss while others fear a similar fate shortly. The uncertainty surrounding this situation has caused a major shift in the way people perceive money. From being a medium that ensures the quality of life to survival – the change is drastic.
Here are some possible impacts of the lockdown on the saving habits of people:
More focus on an emergency fund
While investment gurus always emphasized the importance of an emergency fund, most people didn’t understand its criticality until now. With salary cuts and job losses, many people have realized the role an emergency fund can play in sustainability during a crisis.
A re-look at short term goals and risk tolerance
Hearing about market crashes and experiencing one are two polar opposite things. Many young investors who had just heard stories about market crashes and how people struggled to stay afloat, having experienced one themselves are likely to revisit their risk tolerance levels, diversify across asset classes to safeguard their portfolio and keep a focus on long term wealth creation rather than short term gains now.
Budget rejigs to reduce avoidable expenses
Many people might now want to revisit their budget to accommodate only the essentials. This may continue until the economic situation improves, job security is strengthened and economic packages or relief are received to spurt spending again.
Increased focus on liquidity
Investors with funds stuck in illiquid assets like real estate realized that during emergencies, liquidity is an important factor. Hence, we can expect such investors to re-balance their portfolios between liquid and illiquid investments.
Is this sustainable?
We always believe that when it comes to financial matters, people should think and act rather than react to a situation. While the current approach towards money is understandable, we think that over the long-term, most people will arrive at a balance between the pre-lockdown and post-lockdown approaches.
Hence, we expect people to increase their savings, invest in instruments aligned with their risk tolerance, allocate enough to their emergency fund, ensure some amount of liquidity, and re-balance their investment portfolios.
Every crisis is a teacher. This crisis will bring a change in the way people perceive money and life in general. However, the sustainability of this change will depend on how smoothly it can be integrated into the current psyche without causing a lot of ripples.
Harsh Jain is co-founder and COO at Groww. Views are personal
First Published: IST