3 Steps To Solve Your Financial Woes........

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3 Steps To Solve Your Financial Woes........

November 4, 2008

 

~Lehman Brothers files for bankruptcy. <../../../../Hum-Our-Tum/join>

~Investors lose billions of dollars in the global financial meltdown.

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~RBI cuts repo to cool down rising interest rates.

 

~Jet Airways Sack 1,900 employees (but thankfully takes them back)

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~Sensex down to 10,000 points... the writing is on the wall. This is

just the beginning and expect more bad news in the days to come.

 

 

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But are you prepared to face these bad times?

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Adversities can be of any kind: global meltdown affecting your job,

depression leading to illnesses, you having no money to pay your monthly

installments... the list can go on.

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To make matters worse your income keeps decreasing while expenses remain

the same or even increase. Tough efforts need to be put in to reduce

expenses. Again this does not happen instantly as we all need time to

adjust to change.

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So in such a situation our very first reaction is to panic. It is common

to most of us except for those who have made an allowance for such

adversities. You might argue that no one is prepared for such a

situation. Well let us see how a three-prong strategy can help you face

such adversities.

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Emergency funds

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This is the most important and the foundation stone of risk management.

A lot has been said and written about emergency funds. It is always

advisable to keep aside at least three to six months of mandatory

expenditure in cash, fixed deposits or liquid funds. But what are

mandatory expenses? These are the expenses, which in any situation, you

have to pay or spend. You can divide them as fixed mandatory

expenditure and variable mandatory expenditure.

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Fixed mandatory expenses are all the loan installments, school or

college fees, insurance premium and rent if any.

 

Variable mandatory expenses include your monthly groceries, utility

bills which includes electricity, telephone and others like internet

usage and transportation expenditure.

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These are the most basic expenditures which most of you have to deal

with every month though it differs from person to person.

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Sum up the above two expenditures and the figure you arrive at is your

compulsory expenditure. You have to keep aside at least three months to

six months of this figure in the form mentioned above.

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Why an emergency fund? <../../../../Hum-Our-Tum/join>

 

Generally, in any financial or medical adversity three to six months are

enough to come out of it. Hence, once this fund is in place you can

relax because you know you have a financial cushion.

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[http://im.rediff.com/getahead/2008/nov/04slid3.jpg]

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Text: Sheetal Jhaveri | Photographs: Rediff Archive

 

 

 

Insurance

November 4, 2008

 

<../../../../Hum-Our-Tum/join> This is the second fundamental block in

the risk management and equally important.

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Why Insurance

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What does insurance got to do with all this?

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Well, a lot, actually!

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Just imagine you are in a situation wherein you have lost your job and

to add to it something happens to you or someone in the family? You

will be in a major financial crisis. You have your emergency fund but

what if it is not enough to help you cope?

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Irrespective of any situation insurance should be a MUST. So ensure that

you have your insurance in place, both, life insurance and medical

insurance in the form of mediclaim. If you do have them then ensure

that they are active. That is, you renew them as and when their term

expires.

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The above two blocks are very important to build a strong foundation of

risk management. They have to be in place even before you think of any

other form of savings or investments.

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Once the above blocks are secured then comes the third block: Your

savings and investments. <../../../../Hum-Our-Tum/join>

 

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[http://im.rediff.com/getahead/2008/nov/04slid2.jpg]

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Illustration: Uttam Ghosh

 

 

Savings & investments <../../../../Hum-Our-Tum/join>

November 4, 2008

 

Investments should be goal-based. What has goal-based investments got

to do with risk management?

If you would follow a goal-based saving and investment strategy then the

money saved will help you in adverse situations like we talked about

earlier. <../../../../Hum-Our-Tum/join>

 

If you do not require the money do not withdraw and let the power of

compounding work its wonders.

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However, you have to be careful as not to be invested in all the

products in the market. Individuals who have done that have suffered

when the markets go down like they have done in the recent past.

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You should invest according to your needs, responsibilities and dreams.

Once you base your investments on this fundamental idea you will not

have much difficulty in fulfilling your responsibilities even in

adverse financial situations.

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As the world's richest man Warren Buffet rightly said, " Invest within

your circle of competence, it's not how big the circle that counts,

it's how you define the parameters. " That takes us to the most

frequently asked question today: Where to invest? Is it stock market,

fixed deposits, PPF ( Public Provident fund,KVP ( Kisan Vikas Patra )

or gold? You can choose any of these depending on how helpful could

these investments turn out when you need them the most.

 

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[http://im.rediff.com/getahead/2008/nov/04slid1.jpg]

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Photograph: MANAN VATSYAYANA/AFP/Getty Images

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Equities <../../../../Hum-Our-Tum/join>

November 4, 2008

 

<../../../../Hum-Our-Tum/join> Let's take an example. If your goal is

to provide towards your child?s education eight years later then you

should invest in equity markets and expect a return of 12 to 13 per

cent on an average. This is long term goal. Long term does not mean

more than one year. In equity markets long term means at least 7-8

years. It is over this period that the volatility averages out without

you worrying too much. If you have planned accordingly and invested for

long term in the recent past then the current stock market volatility

should not affect you much. <../../../../Hum-Our-Tum/join>

For individual who would like to take advantage of the ups and downs of

the market it is best to start a systematic investment plan,SIP, in

mutual funds. This will help you take advantage of the volatility in

the market and also you do not have to Time the market

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[http://im.rediff.com/getahead/2008/nov/04slid4.jpg]

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Photograph: STEPHANE DE SAKUTIN/AFP/Getty Images

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Gold <../../../../Hum-Our-Tum/join>

November 4, 2008

 

<../../../../Hum-Our-Tum/join> Why do people say that Indians are

better protected in worst case financial problems than those in the

Western countries? <../../../../Hum-Our-Tum/join>

The answer is simple: Indians are the highest consumers of gold. This

yellow metal has always helped everyone during troubled times as it is

the most liquid asset in the world. You should invest at least five per

cent of your portfolio in gold. Remember investments should be in the

form of either gold coins or bars and not jewellery.

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Selling jewellery becomes difficult as well as lead to losses because

the buyer won't compensate you for making charges.

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[http://im.rediff.com/getahead/2008/nov/04slid5.jpg]

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Photograph: Mario Tama/Getty Images <../../../../Hum-Our-Tum/join>

 

 

 

 

Debt

November 4, 2008

 

<../../../../Hum-Our-Tum/join> For short term investments debt products

rule. You can look at options like fixed deposits (which offer anywhere

between 10-11 per cent on a deposit of 390 days) or fixed maturity

plans which are also a good bet now. Also, PPF is a good form of

investment even though the maturity period is of 15 years.

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However, remember to save/invest as per your goals. Troubled times or no

troubled times at least you will have saved for your goals.

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[http://im.rediff.com/getahead/2008/nov/04slid6.jpg]

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Illustrations: Dominic Xavier <../../../../Hum-Our-Tum/join>

 

By Sheetal Jhaveri is a financial consultant and can be reached at

<../../../../Hum-Our-Tum/join> dhanplanner

<dhanplanner .

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wake up one day and realise that you have lost a diamond while you

were too busy collecting stones. " Remember this always in life.

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