The economics of the present is somewhat different, do not lose sight of financial goals. Calm down.

Present times, Pandemic_financial goals
Whatever be the current circumstances, do not lose sight of your future financial goals. Stay calm and make informed decisions, speak to a financial adviser. Your decisions today have the potential to have a snowball effect on your future-positive or negative.

I watched the movie Star Trek- First Contact a long time back, but the below exchange between Captain Picard and Lily has stayed with me.

Captain Jean-Luc Picard: The economics of the future are somewhat different. You see, money doesn’t exist in the 24th century.
Lily Sloane: No money? You mean, you don’t get paid?
Captain Jean-Luc Picard: The acquisition of wealth is no longer the driving force of our lives. We work to better ourselves and the rest of humanity. Actually, we’re all like yourself and Dr. Cochrane.

Star Trek- First Contact 

If only, we were living in the Star Trek’s version of the 24th century. We live in the 21st century; Money still makes the world go round! Hard currency, dough, bucks, moolah, bartan; call it by any name, the usage remains the same, i.e. to improve our and our loved ones’ lives.

We are always in a constant battle with our past, present, and future. We want to, improve upon our past, live our present comfortably, and secure our future.

While we invest, to improve upon our past (wealth creation) and secure our future (retirement, child’s education, etc.), our ‘present’ dominates the thought process, especially in a crisis like this pandemic.

The future takes a back seat and let me think about the now first’ thinking comes over. ‘If I do not take care of the present, then how will I build our future?’ We start making decisions based on today’s circumstances without thinking about how the future is getting impacted due to those decisions.

We start cashing-in our long-term investments earmarked for non-negotiable financial goals like the child’s future, retirement etc., stop paying life insurance premiums, stop our regular savings/investments. This can be evidenced by the persistency data of life insurance and investment companies.

These are tough times, no doubt. The uncertainty is irritating—loss of a job, salary cuts, compounding the uncertainty. Nobody is sure if this is going back to normal or not. If it is, then when? But this will pass. Hence, we can’t stop planning for the future.

Food for thought to help you keep track of financial goals:

  1. A 50% withdrawal from your investments will require 100% returns!

Example: If you withdraw USD 25,000 from your investment value of USD 50,000 earmarked for your retirement then the remaining USD 25,000 will require 100% returns to reach the same USD 50,000 [(50-25)/25]. This 100% returns will take time. If your financial goal is nearer, then you would have to invest more or take higher risks to achieve higher returns to make up for the money withdrawn. Think ‘Do I really need this much?’ before you withdraw.

2. Avoid foolish thoughts

Stopping the premium now of your long-term protection policy like life cover, critical illness cover or disability cover, thinking you will reinstate or buy a new one later, will be a foolish decision. The reasons are-

  • You are not getting younger, reinstating a policy or buying a new one requires underwriting. There is always a risk your application may be rejected due to a health issue you are not aware of. Keep the existing cover running!
  • You bought it cheap as you were younger.
  • Life insurance need is acute in times of crisis like this pandemic. There is always a possibility of a double whammy of loss of job and a critical illness. An existing protection cover is like a pot of gold for the loved ones to meet any eventuality. Cut down on your non-essential expenses and make sure you pay your premiums.

3. Any withdrawal or halt in regular savings diminishes compounding effect

Example: Say you were saving USD 20,000 per annum for retirement to accumulate USD 1 million (expecting 6% CAGR) in 25 years. You saved for 5 years, and the pandemic hit. The below table illustrates the effect of the decisions taken.

ScenarioA Break in SavingsEnd Fund value @6%Deficit
IdealNo breaksUSD 1,163,128
Not so idealMissed one premium
in the 6th year
USD 1,098,985USD 64,143
WorseMissed one premium
in 6th year and withdrew USD 50K
USD 947,705USD 215,423
Table 1: Assuming no charges or fees for simplicity

As you can see, the returns are diminished.

Whatever be the current circumstances, do not lose sight of your future financial goals. Stay calm and make informed decisions; speak to a financial adviser. Your decisions today have the potential to have a snowball effect on your future-positive or negative.

Stay safe, stay protected. Your’s and your loved ones’ future depends on it.

Check out our financial tools and calculators below to help you plan for your financial goals.

Source: https://www.linkedin.com/pulse/economics-present-somewhat-different-arvind-krishnan/

Note: A financial plan looks at all aspects of your finances and considers the past, present and future. If you want to connect to a financial adviser for your financial goals, we can help you. In all these years in financial services, we have built relationships, and you can leverage those relationships for your benefit by connecting with us

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Arvind Krishnan
Arvind is a CERTIFIED FINANCIAL PLANNER professional and a proponent of Design Thinking with over 17 years of experience in financial services including product management, training & development, and sales.

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