Its true that no one financial plan can look like another. Every individual and every family is different. In behavioural finance, one is taught to avoid ‘herd’ mentality ie. the inclination to conform with what others are doing. Don’t invest in equity assets just because your neighbour is, make sure you have the ability to manage equity risk and remain invested for a long period.
While this makes sense, there are some goals which ought to be common for all families and individuals alike. If anything, this current crisis has taught us the importance of a sound financial plan and to achieve that we must all incorporate these three standard practices in our money management.
1. Save more than you spend
This sounds like common sense, but it’s tempting to pass up all the attractive window displays without indulging a bit. The silver lining in this lockdown has been the revision of what we really need in our daily lives. The fact that spends have reduced dramatically without altering lifestyles means that we were perhaps spending too much on things which are not needed. By overspending today, we end up sacrificing our future lifestyle as that’s the amount by which we are under-saving and under-investing.
As a practice try to save first and then spend. Also, save more than you would spend on non-essential items like entertainment, shopping and eating out. Creating a balance is important but tilting it a bit towards saving will help you more.
2. Pay off that extra debt
Many of us rely on instant gratification and delayed payments for things that we buy. In other words, we buy on credit. Right from buying a car on loan, to paying for clothes and toys on credit cards to credit card balance transfers to another credit card. There is no problem with this if you can control your expenses and repay on time, if not you are falling prey to the debt trap. You won’t realise how much over the budget you are going until it is too late.
Now that you are at home, with fewer outlets for your cash to be spent, use it wisely in repaying debt that you don’t need to carry forward. Buying consumer durables on credit or overdrawing on your credit card limit is detrimental to your overall financial health. Not only can too much debt make us overspend beyond what we can afford but also the interest payments come back to bite.
Now that you are at home, with fewer outlets for your cash to be spent, use it wisely in repaying debt that you don’t need to carry forward.
3. Plan your future spends
When you have large spends in future, it’s not enough to just save for them. You need to have a plan. The current crisis has shown us that the worst-case scenario can come true. For so many businesses, it’s a time where revenue is out of the question and they are bleeding cash.
Business owners find that they are in a tough bind and being loyal to the business versus personal expenditure is so tough. In such situations a pre-defined plan of action around known large-sized expenses can be helpful. A financial plan that enables you to withdraw from growth assets, an amount earmarked for a specific goal much in advance and move it to a stable investment option is one such tool that can be used.
Its in times of crisis that we can appreciate the important of being prepared. Its never too early to start preparing your finances so that we can tide over the next crisis whenever it may come.