Jayant Nair of MSVentures Financial Planners lists out dos and donts relating to one's personal finances.
MSVentures Financial Planners
Amidst all the ups and downs in the stock markets, lot of investors are clueless as to what steps should be taken to ensure a balance between growth, risk and liquidity. It is significant to revisit the prudent approach to managing one’s finances. At this juncture, one should introspect and stick to the dos and donts!
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- Revisit your Income levels: Allocate additional surplus towards increasing monthly investments to ensure you meet your financial goals in a timely manner. As Warren Buffet says, be fearful when others are greedy and greedy when others are fearful.
- Ensure sufficient contingency funds: With unpredictability in job markets, 6 months expenses should be readily available in case of temporary loss of income. In an unfortunate event of loss of income there should be sufficient liquidity to manage the minimum household expenditure.
- Track your fixed and variable costs: Typically, a household has component of variable (say going out for a dinner) and fixed expenditure (say the Rent, Maintenance). Variable expenditure is the killer. One should use their discretion and evaluate all the options before splurging on variable avenues.
- Ensure adequate life and health insurance: Loss of earning family member or a medical emergency has a serious implication on the cash flows. The right kind of life insurance policy and health insurance policy needs to be taken to cover the risk and hence maintain the requisite amount of cash flows.
- Revisit your Insurance portfolio with your financial planner: By and Large, Insurance is perceived as a return generating tool (Investment). To address this perception, insurance companies sell endowment insurance and ULIP plans which are unreasonably expensive to the insured. It is important to discuss the existing policy details with ones financial planner to understand whether to surrender the policy or continue till maturity apart from taking the right kind of policy.
- Stop the SIP: Worry about the market sentiments leads to many investors discontinuing their SIPS. This is not advisable as the investors will lose out opportunity to reduce the cost of their investments.
- Investing on the basis of tips and peer advise alone: Tips and free advises have perennially been abundant. The person giving the advise may not necessarily have anything to lose but the investor runs a risk of mismanaging his finances and the entire portfolio may go hay-wire.
- Savings: The balancing figure : Most of us are in the habit of spending money first and saving what ever remains. Ideally one must work on limiting the expenditure to what remains after saving for the financial goals. Expenditure should be the balancing figure.
- Investing only to save tax: Investing is an activity which is done by most of the people for availing tax benefits. This should be avoided. This way, one would limit the investments only to the extent the tax benefits are provided. Over a long period of time such an approach would lead to major shortfalls in achievement of financial goals. Set your eyes on the goal and march towards those. Taxes to be saved should be a part of the financial plan and not the only goal in life!
- Borrowing (taking loan) for purchasing a depreciating asset: Remember always, loan does not come free of cost. The interest paid on the loan is the cost. To make sense, an asset is purchased with a cost attached to it must yield some benefits which are higher than the costs incurred. An example of appreciating asset could be Real estate(Let out property). A depreciasting asset could be a car, laptop etc.
The author is the chief financial planner at MSVentures Financial Planners.