Are you dependent on your long-term investments to face emergency? Your cashflows need a check…

As the whole world is currently facing the unforeseen situation, we are facing and managing many things on many fronts. Finances is one of the major aspects!

While we are still finding answers to our current investments and whether to continue them or not, how to pay for EMIs, how to utilize this time and do something to earn money, how to run the household expenses and many such questions; I came across news about large no of people have withdrawn from their PPF holdings and other long term investments so far.

Off course, they took the provisions given by government to face these times and redeemed their own money to use from PPF and other investments; but this made me think on cashflow management, lifestyle inflation and budgeting!

When so many people are depending on their long-term investment like PPF or any suitable long-term investment instruments to run their expenses its alarming! Such instruments are not only tax effective but also lucrative, highly safe and important instruments for long term goals like retirement planning. When you redeem your investment in PPF or any other instruments, your goals linked to that investment remain there to achieve but, your hard-earned money which you invested in it and your future cash flows get disturbed too.

So, we need to find the reasons and alternatives…

Check on your lifestyle expenses:

When we earn money, we either invest it or spend it. We need to spend it on many things on a daily basis. Some are our wants, and some are our needs.

When we start spending more on our wants, our income-expense relation gets disturbed. We feel the greed to have more and start spending huge money unknowing. Its not necessary that, when you spend huge money on any expensive item, then only your income-expense ratio get disturbed, but, when knowingly or unknowingly , you start spending on the items you want to posses on a regular basis, at one fine moment you realize the holes in your pocket.

It surely takes time because you spend using your credit cards, personal loans. You are able to pay those bills on due date but potential of your income to get returns form your investments, gets lost.

We buy these items, out of greed and also to show off to the world.  When we feel content with what we have, these lifestyle expenses start decreasing

Today, many people have lost their jobs, almost all are facing losses in their businesses and they are finding it difficult to adjust with change in their lifestyle.

To stay away from any such changes in lifestyle, our behavioral finance needs a check.

How are you managing your cash flows?

Everyone receives income from their profession. We have some fixed expenses to pay for on the other hand. We utilize this income and pay for them. Some fixed expenses are for our needs, like home loan EMIs for our shelter, our kirana expenses, educational fees of children, medical expenses etc.

Some variable expenses are also present every month. Like, shopping, hoteling, traveling etc.

It’s important to manage these cash flows on a regular basis. One must spend first on their needs and fixed expenses and should be careful while spending on their variable expenses. Variable expenses can be controlled and that money can be used for any investment or saving or any important future expenses.

We should account our cash flows, just like companies or businesses do. Make a diary or draw an excel sheet to record these cashflows.

Over a period of time, we can read and judge, where and how our money is going. How we are investing, spending, saving and handling our money.

This is a mirror of our cashflows which can help us in future. With this, our expenses will be on track.

Budgeting is a way to financial independence:

Until few years back, people were content with what they had and used to spend within their means. They knew their boundaries and used to stick to it.

Earlier, there were no any attractions like discounts on shopping, % off sales, credit card offers, cash back, bonus points, personal loans, free items on offer along with purchase of main item.

People were spending within their means because of their ‘Budgeting’. These budgets were their guides to spend, invest and handle money effectively.

Due to budget preparation, they could achieve desired standard of living and could give better life to their future generation.

But, over the years this habit of budget preparation started fading away. People started earning handsome money, they got exposed to many options to spend money on, alternative to spend money through various modes like credit cards. More earnings made them busier in life and so such habits took a back seat.

But, it’s time to go back these old school theories! We should start making a conscious effort to write a budget every month. It can be for a month for routine expenses or for a year for any planned future expenses for expensive items.

This will guide you to spend money wisely, it can be on track. It will also curb unwanted expenses and you will be in charge of your money.

In todays times, while making a budget, you can follow one formula-

{Your total monthly income [-] Your total monthly investments} = Your monthly expenses

This formula will help us to prioritize our investments and spend wisely on items and services we actually need.

Are your investments linked with your goals?

Generally, people invest their money when they feel like to invest for future or when they find returns attractive enough to invest.

Often, they end up investing randomly. They often don’t know basic details of the instrument they invest in. This ends up in creating a mismatch in their expectations of returns, their goals, risk appetite and investment tenure.

So, when they face such emergency, they panic as their investments go for a toss, they don’t even have enough corpus to pay for household expenses.

On the other hand, when we invest as per our set goals, then all our future goals are taken care off and investments are also made as per our risk appetite and investment tenure.

During such emergency situation, where whole economy and investments face troubles, we can continue with our investments which are linked to our goals and review it actively.

So, please invest as per your goals, risk appetite and investment tenure. So, you can take active reviews of your investments, you will not loose your peace when your returns go down during such phase and you can continue to invest as per your set investment strategy.

Do you have your emergency corpus?

‘Contingency fund’ or ‘Emergency fund’ is one of the strong pillars of ‘personal finance’. We make investments for future goals, we take care of our insurance cover too, but when we face any unforeseen situations, our cashflows face troubles.

Emergency never come with prior indications, but in that situation also, we have to run household expenses, pay for fees and loan EMIs.

To keep our ongoing investments, lifestyle and household expenses smooth going; we need to have a separate emergency corpus with us.

We should create emergency corpus equivalent to at least 12 months of our monthly household expenses. These household expenses should include, your monthly kirana expenses, medical expenses, school/college fees of children, Loan EMIs, bills etc.

We should invest this amount in liquid instruments like liquid mutual funds, short term bank FDs etc. from where we can redeem our funds easily and we can receive the proceeds in shortest span of time.

This contingency fund helps us to face any unforeseen situation smoothly.

With this by our side, our long-term investments like PPF, equity mutual funds etc will be intact and will continue to earn their respective potential returns.

So, with some simple checks and active re alignment of our cash flows, thoughtful investing, we can face the unforeseen thoughtfully. Thereby, such situations will be smooth for us and other aspects of personal finance will be intact.

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