Financial problems faced in 2016
Financial woes had been troubling Arjun Kumar since the start of the year 2016. Bearish stocks, burden of home loan interest (cost of debt), rising lifestyle expenses and the burden of tax on various income sources had turned 2016 into a financial roller coaster for him. Well aware of the turbulent times that lay ahead, he decided to take prompt action. That's when he sought my help.
I advised him to kick start the next financial year on a fresh note. To begin with, he must reallocate his funds among multiple asset classes so as to lower the risk to return ratio. He should ideally sell the loss making stocks and spread out his investment over debt and equity in a rational manner. Transferring funds to debt instruments will inevitably yield moderate gains but it would also drastically reduce the associated risk.
Controlling cost of debt
Secondly, in order to deal with the high cost of debt, he must carefully analyze the interest rates offered by national as well private banks. After thorough research, he must narrow down his choices to banks offering the lowest interest rate for the home loan he needs. He should then opt for pre-closure of his existing loan account and shift the liability to the new bank that offers an extended payment period along with lower interest rates. This essentially helps in bringing down his monthly cash outflows and also ensures better management of funds.
Thirdly, he must prepare a monthly budget and stick to it in order to do away with frivolous lifestyle expenses. He must adopt the habit of keeping a record of daily expenses so that he can figure out the pattern of his spending and cut it down in a practical and actionable manner. As widely propagated by the financial guru Warren Buffet, he must also look out for alternative sources of income to meet the rising cost of living.
Opting for tax exempted investments
Lastly, the high level of taxes can be eliminated by carefully planned investments in tax exempted financial instruments such PPF, insurance policies, ULIPS etc.
Tips for bouncing back in 2017
Arjun is not alone in his troubles. There are many people out there who had trouble managing their finances in 2016, who could have done a better job had they followed a more approach to managing money.
Accept the situation
The first thing one must do in order to come out of a taxing financial situation is to stop living in denial and accept the facts. This is the first step to getting back on track.
Next, he must devise a plan to restructure his investments in line with his liabilities and risk appetite. A reasonable debt to equity ratio must be achieved in order to maintain financial stability all around the year.
Avoid Unnecessary Spending
This must be followed by laying out monthly budgets and strictly following them. One must adopt the habit of maintaining a record of daily expenses to keep track of where the money is going and avoid extravagant spending.
Review Debt Scenario
Careful analysis of your monthly expenditure towards debt would take you much closer to cutting it down. Once you have figured out the total cost of debt you can employ ways such as paying out the debt bearing higher interest first, opting for alternative sources of income and limiting your expenses.
Constant review of the debt situation will help limit the cost of debt and get rid of outstanding bills.
Saving isn't an easy task but it is one of the best ways of securing your future financially. You must ideally save 30 percent of your income every month or even more, if possible. One such way to do so would be to open a recurring deposit (RD) account, instruct your bank to deduct a fixed amount from your savings account every month and credit it to the RD account. In this manner you can achieve your goal of higher savings without too much hassle. Your savings would keep rising without you realizing it.
Well defined financial goals
Last but not the least, you must clearly chalk out financial goals and have a clear plan of action in place to accomplish these goals. If need be, look out for novel sources of income so that you do not have to live on shoe string budgets.
"Be the CEO of your life"- Robin S. Sharma -
QUOTE OF THE DAY
While credit cards come with a host of benefits, they must be used carefully, and never in these situations!
Inflation in education related expenses is expected to increase faster than average inflation. This means that depending on debt instruments to plan for your child’s education needs even 20 years before time, is no longer a feasible option.