How to Protect Your Money During Economic Uncertainty
Your First Step - Create Your Emergency Buffer
The first priority of any financial protection strategy is to have cash available for your immediate needs.
Three Months Is No Longer Enough
- Strive for 6-12 months of liquid savings that can cover your basic needs.
- By placing your cash in high-yield savings accounts that pay 6-7%, you can be assured your cash is not losing value to inflation while also ensuring you are insured by the FDIC or an equivalent organisation.
- To build your emergency buffer, set up an automatic transfer to your savings account in the amount of ₹10,000 each month.
- When you lose your job or stop getting freelance work and have an emergency buffer built up, you will not experience the type of stress associated with needing to sell equities at low prices or falling into a cycle of high-interest debt.
- Households with emergency buffers have shown to have lost 30% less wealth during the economic turmoil between 2020 and 2022 compared to those households without an emergency buffer.
Diversify beyond “Stocks and Bonds”
Historically, traditional portfolios are subject to episodic destruction due to economic uncertainty. Spread the risk across multiple asset classes.
- Gold and Precious Metals (10-15%)
- gold or ETFs hedge against inflation and currency drops; India's sovereign gold bonds provide 2.5% interest, as well as tax-free capital appreciation.
- Real Assets
REITs and Farmland, Commercial/Industrial REITs provide an 8-10% dividend yield; Fractional farmland platforms allow an investor to buy crop income streams (₹5 lakh) and also have a low correlation to stocks.
- Short-Term Fixed Income
Lock in a return of 7-8% for 3-6 month Corporate Paper, Treasury, and use a "ladder" methodology with regards to maturity to maintain flexibility and stay liquid.
Eliminating Debt: The Silent Wealth Builder
High-Interest Debt is a faster killer than a Down Market; Prioritize Debt Elimination Order.
- Credit Cards (36%+) → Personal Loans → Home Loans (8.5%)
- Refinance if Possible; Extra Payments to Principal Cut Years from Home Loan Payoffs
- Golden Rule- Do Not Borrow for Depreciating Assets- Automobiles, Gadgets.
Paying off a ₹5 lakh loan at 15% saves ₹1.2 lakh annually in interest (a guaranteed 15% return with no market risk).
Defensive Income Streams
Relying solely onSalary creates Additional Risk; Consider building a backup plan.
Rental Income
Rental Income in Tier 2 Cities- Investing ₹40-60 lakh in a 2 Bedroom, 2 Bathroom Apartment yields 4-5% in Rental Revenue in cities like Ahmedabad, Coimbatore; Utilize Online Platforms to Screen Tenants, Process Rent and Save Time.
Dividend Aristocrats
Investing in Average Stock That Has Paid Rising Annual Dividends for 20+ Years (Examples: HDFC Bank, ITC) Provides Stability; Reinvest Dividends at Dips and Withdraw During Crisis.
Side Hustles That Scale
Online Courses, Consulting and Rental Arbitrage Opportunities Have Low Start-Up Costs but High Profitability Potential if/when Your Primary Income Is Unstable.
Cash Flow in Relation to Total Asset Value
Do not underestimate cash flow both in and out. Monthly, stick to tracking incoming/outgoing cash flows. Check regularly with apps like Walnut. Apps like these reveal leaks where your money is going (e.g., subscriptions, impulse purchases) that can take 20% of your income away.
Two best ways to increase cash flow:
(1) reducing 10% of fixed expenses (e.g., renegotiating home owners insurance) and
(2) increasing your income by 5% (e.g., learning new skills, negotiating higher salary, or monetizing a hobby).
When you use compounding strategies, you will double your protection against market downturns.
Tax Efficiently: Keep More of Your Earnings
Tax drag will increase during times of economic uncertainty. To maximize tax efficiency:
(1) maximize ELSS, PPF, and NPS to claim tax deductions;
(2) use year-end tax harvesting to reduce taxes owed; and
(3) strategically give away assets to family members in lower tax brackets.
Ultimately, ₹1 lakh saved in tax will grow to ₹1.2 lakh after 5 years when invested at 8% per annum.
Mindset: Long Game = No Panic
The Headline news daily is DOOMSDAY!!! The markets will recover!!! Only those with Emotional Discipline will survive!!!
There are three basic rules you should follow when investing:
(1) rebalancing on a consistent annual basis rather than reacting to market activity
(2) maintain a cash reserve of at least 20% of your portfolio to capitalize on foreclosures and/or market downturns and
(3) be sure you review your portfolio quarterly and make adjustments without making too many changes.
When Situations Are At Their Worst, Be Cautious (6 Months).
(1) Think carefully before buying anything big until you know what you really need versus what you want.
(2) Look towards Government Bonds (eg, T-Bills) over Corporate Bonds (e.g., Bonds) during times of credit crises.
(3) Do an Insurance Audit on all types of Insurance – use Term Life Insurance and Health Insurance to replace your entire Savings Gap.
Financial Protection Strategies are boring until you need them. Once they are needed, they can be invaluable. Begin by evaluating your true emergency needs today, then build from that point forward. Remember that cycles repeat themselves (good times and bad times) but preparation will always be your saving grace as you prepare for your future stability, compounding daily.