Coronavirus impact: How to deal with a pay cut

The novel Covid-19 has hampered the world's economic activity at an unprecedented scale, raising the spectre of job losses and salary cuts. Depending on income and monthly expenses, salaried individuals fall into three buckets.

Those who can continue to pay for expenses, including equated monthly instalments on loans, and invest regularly, reported Bloomberg.

People who can manage expenses but are likely to fall short of money to continue investing. Salary earners who may struggle to manage expenses.

The first category needn't worry. But, according to financial advisers, those in the second or the third bucket can do a few things to tide over this difficult phase.

Gauge the possibility of a pay cut

First and foremost, be aware of the possibility of a pay cut. While organisations may not want to lay off employees, the drain on resources may force them to temporarily cut pay, according to Suresh Sadagopan, founder of Ladder7 Financial Advisories.

If there is a likelihood of a pay cut, the earlier you know about it the better you will be able to plan. Arvind Rao, certified financial planner and founder of Arvind Rao & Associates, has already come across instances where businesses have discussed with employees about the amount of salary they would need to get by if there were to be a cut.

Avail moratorium on loans

"If you are going to struggle to pay for expenses and EMIs after a potential salary cut, you should go for the moratorium being offered on all retail loans," Sadagopan said.

The Reserve Bank of India on March 27 permitted banks and other financial institutions to allow borrowers a three-month moratorium on payment of installments of term loans outstanding as on March 1. This option is, however, not an EMI holiday and interest continues to accrue which will be added to the principal and recovered either by increasing the EMI or the term after the moratorium ends. Still, it offers immediate relief.

If individuals are just getting by, they should pre-empt the struggle for funds and avail the moratorium, said Sadagopan. Harshvardhan Roongta, certified financial planner and founder of Roongta Securities, said another option in this situation would be to sell some investments.

"If there is a situation where you can liquidate certain investments, then you should do that and not stop EMI payments," he said. "If you're not able to do that, then take advantage of the EMI moratorium."

Stop investments

There's no harm in pausing monthly investments if that would shore up contingency reserves.

"You need to temporarily stop your investments because the more important thing is to get on with life," said Sadagopan. "Whatever salary cut the individual is facing is not permanent. It is not because they have been inefficient… It's no reflection on the person's capabilities."

Sadagopan said sooner rather than later earnings will bounce back to original level. It's even possible that organisations, if possible, will compensate employees for the lost income by giving a bonus, he said.

Yet, systematic investment plans or SIPs of mutual funds can't be halted immediately and withdrawals, too, take time. Asset management companies require 15-30 days to stop SIPs, said Rao.

"If you're in urgent need of the funds and there isn't enough time to ensure the payment doesn't go through, the other option is to ensure that bank account has inadequate funds on the due date," he said. "This will result in a return charge by the bank, but the AMC won't charge a penalty."

Prioritise short-term goals

If you have some amount available to invest but not enough to continue all your regular investments, you should ideally focus on near-term goals that are non-negotiable, said Rao. For long-term goals, there is more leeway to make up the difference when normalcy returns.

This is also a great time to sit down and analyse your expenses, according to Rao. With discretionary expenses severely curtailed because of the lockdown, it's easy to identify how much money you absolutely need for your living expenses, he said. "That should leave a little more gap for people. And that gap could be used to make up for some of the shortfall in the investments."