In my article Lock Down! The PAN INDIA Big Boss!! , I spoke about the positive side of the Lock Down & how we all still have our precious blessings of food, clothing, shelter & our loved ones around.
I spoke about making a list of things & assets that we still have with us. This gives us immense confidence while handling day to day tasks during this challenging time. Also, I urged the readers, to revisit & rework financial priorities & investment plan.
In current scenario there are two reasons why all of us need to rework financial priorities-
- Some of us might be facing cash crunch due to stretched lock down
- To stay prepared for future the financial fall out if any
No one clearly knows what financial implications we may face after this Covid-19 lock down situation. However, there are few financial experts who are predicting that, common citizens may face worst effects of this situation due to huge business loses and slow down & it will take nearly 18-24 months for complete economy revival. To cope up with this, companies may plan cutting employee salaries or lay off their employees.
Also, some of the investments are also at risk. Many of us might be aware, globally reputed & India’s 9th largest Mutual Fund house “Franklin Templeton” announced on April 24th that, they are winding up six debt mutual fund schemes. Debt schemes are considered low risk & stable investment option for mutual fund investors. As India has taken the massive economic hit due to lock down, investors started pulling their money out from these debt schemes as they needed cash or they were concerned for their invested money.
This surprising “winding up” decision by Franklin Templeton has sent shock waves across the market & public at large. Seasoned Investors who usually love to invest in market slowdown are also waiting for this time to pass now. The reason is quite obvious; no one knows what will happen next & no one also wants to land up in financial contingency scenario.
So, in case there is some financial contingency then, “How do we plan to handle it? “
The answer is simple, by planning well in advance for it & staying disciplined towards the planning. Considering the period from today for next 18-24 months, we can work upon certain things. In depth financial planning will definitely help to keep us on track & it will offer certain peace of mind too.
You can do your own financial planning by below steps-
- Evaluate your present financial situation
- Set financial goals & prioritize them
- Understand cash flow & make a budget plan
- Analyze your life, health & general insurance needs
- Monitor your financial situation periodically
- Create an Emergency Fund
Let us look into above steps in some detail –
Evaluate your present financial situation
When you decide to start financial planning, the first thing you need to know is what is your current position. Understanding your strengths & weaknesses will assist you in taking better financial decisions. In order to do this, you need to record regarding below aspects in a systematic manner-
- Personal details & dependents details
- Health related information of self & dependents
- Your assets & liabilities like loan repayment installments & credit card bills
- Insurance details (Life, Health & General insurance)
- Existing investments & asset allocation
- Plan for major developments expected in coming time like marriage, child birth etc.
Set financial goals & prioritize them
Goals & objectives provide a focus, purpose, vision & direction for the financial planning process. So, when we are planning for next 18-24 months, it is very important to determine clear & specific goals. Once you decide on the goals that you want to achieve, prioritize them.
In order to prioritize your goals, it is important to understand the difference between ‘needs’ & ‘wants’. Needs are things you must have to live such as food, clothing & shelter. Wants are things you would like to have but do not need in order to live.
Everyone must understand this, there is a high chance that we may go for unnecessary shopping once this lock down is lifted. We all are under lock down since so many days & may end up spending much more than needed. So, please understand the difference between your needs & wants & then make shopping list before you leave your home.
Understand cash flow & make a budget plan
In simple terms, cash flow refers to the inflow & outflow of the money. It is a record of income & expenses. The purpose of cash flow planning is to ensure a surplus. To control expenditures & to prevent debt traps one must have proper budget plan.
Budgeting is the best & most practical way of tracking spending. A budget helps you ensure that your income & expenses match. Budgeting also makes it easy to figure out the adjustments needed in spending habits.
Below are the steps involved in making a budget-
The Firsts step is to list the sources of income. Income that is regular counts the most. This includes income received such as salary, pension, rent, royalty or income from any other regular resource.
It may not be possible to estimate some incomes, like interest & dividend incomes, bonuses & income from business, accurately on a monthly basis. In such situation an annual estimate can be made & divide it by 12.
Expenses should be divided in three categories in a budget: fixed, variable & discretionary.
Fixed expenses may include- loan repayments, rent payments, insurance payments.
Variable expense includes- Electricity bills, telephone bills etc.
Discretionary expenses include – Dining out, movie tickets, club memberships, hobbies & other bills that don’t require a consistent payment.
It is a good idea to write down the fixed expenses first. Although variable expenses are regular as fixed ones, they are not the same each month. If there is any surplus after accounting for fixed & variable expenses, you may allocate funds for discretionary expenses & investments.
- Separate wants & needs
After making list of expenses, check for items where costs can be cut or eliminated entirely. This is especially important during this critical period of next 18-24 months & this becomes more important if you are budgeting to eliminate debt or save money for a specific goal.
- Get the family on board
For successful budgeting, everyone in the family needs to know & understand the budget. Your spouse, kids, elders must be aware of this budget plan & understand the limits of spending.
- Review the budget periodically
A budget plan is not a “make & forget thing”. It is a working document. Follow the budget every month & make required changes according to the needs.
Analyze Insurance Needs
Since we are planning to handle contingencies that may arise in next 18-24 months, we must look into the insurance requirements of self & dependents. The purpose of buying life & health insurance is to protect our hard earned savings & in case of death of bread winner of family, the family should be protected with insurance amount.
Those who have not given a thought to buying a life & health insurance so far must buy one immediately, as insurance companies may also increase their premium rates due to this Covid-19 situation.
- Buy a term plan of life insurance as it gives more risk cover in lesser amount than rest options
- You can buy health insurance with family floater option which covers spouse & children also
- You must buy a health insurance for dependent senior members of family as they are more vulnerable
Once you are through with the budget plan & working on it, it’s always advisable to monitor your budget & financial situation periodically. If the actual expenses are more or the actual income is less than the budgeted, it’s time to give the budget a close relook & take immediate action to make it more accurate.
The following may be suggested-
- Control excessive expenses not planned under the budget
- Check if expenses under a particular head were budgeted under another head
- Check if there was one-time non-discretionary expense that overshoot the budget
- If necessary, curb discretionary expenses to adjust for increase in expenses not planned earlier in the budget
Creation of Emergency Fund
None of us have the ability to forecast the future or predict the hurdles that lie ahead of us. Moments of crisis are inevitable & they usually cost money. This makes building an emergency fund a financial priority.
Experts always advocate to create an emergency fund of minimum 6 months of budget requirement. In my opinion, those who did not plan for it earlier must plan for at least 3 months’ requirement. In case of loss of job due to this Covid-19 scenario, one must be able to handle the budgeted need for at least 3 months.
One must understand, no one was prepared for the critical situation of Covid-19 lock down, however we can control our response to it. The more you are organized, less stress you will have. The purpose of this financial planning is to stay prepared & manage our finances well during next 18-24 months. In addition to the points I have mentioned, one can take expert advice to understand in length & prepare accordingly.
Do let me know your feedback about the article in comments box below & some of the ideas you have implemented for a positive change in budgeting