Slowdown KIT

Slowdown KIT

Weve learnt our lessons the hard way. But rather than wait for the next recession blow, one can play it safe. Sanjeev Sinha lists 10 points that can equip you to deal with similar situations


THE OVERALL impact of the financial meltdown, which is certainly huge, is now evident across the world. Particularly , the pain of job losses and drop in savings is being felt everywhere. This, in turn, has instilled a sense of fear and cynicism in the minds of investors globally. Still, while we are making vast efforts to extricate ourselves from the current crisis, little effort is being made to prevent the next one. Rather than wait, however , there are many things which can be done now to avoid another crisis, or at least cushion the blow when it comes. Listed below are 10 personal finance lessons we can and should learn from the meltdown:

CONTROL EXPENSES & STICK TO THE BUDGET

You are more likely to face financial problems, if you have been extravagant in your expenses. However, in a bid to tide over the current crisis and also avoid such crises in future, you need to adhere to some financial disciplines, and making a budget and sticking to it is one of them. Sticking to the discretionary budgets, in fact, can help you handle the uncertainty in the non-discretionary expenses.

DONT COUNT ON TOMORROWS INCOME

Counting on tomorrows income to spend today is one of our greatest mistakes, which has already been proved by the current crisis. In fact, up until the financial meltdown hit us, the spending levels of individuals, especially in the 25-35-year age group, have been almost equal to their income, if not more. With the easilyavailable loans and credit cards they were tempted to indulge even without being able to afford the expense. Now with pay cuts and job losses, they are facing the worse. However, even if you keep your job now, the prevalence of pay cuts makes it clear that you cant count on an ever-expanding paycheck to make up for your spending, says Lovaii Navlakhi, managing director & chief financial planner of International Money Matters.

MAINTAIN LOW DEBT

Prioritize your debts. Pay off your loans with the highest interest rate first. Basic advice, right The problem is that people have been reiterating this theory for years, but most do not put it into practice. This step requires one to plan out ones debts and then follow through by reducing it regularly and systematically. True, paying off debt can be a difficult task, but it can also be quite rewarding as it gives you peace of mind, says Navlakhi.

GO FOR STRATEGIC ASSET ALLOCATION

Time and again we will hear from the so-called experts that there is a paradigm shift in the market dynamics and that investors need to revise asset allocations more aggressively to meet the impending demands of their future lifestyles. But one should strictly avoid falling for such traps. Though temporarily the portfolio may appear underperforming, sticking to fundamentals of strategic asset allocation would always help investors come out of such temporary market mishaps, says Ramesh Patibanda , director financial planning, Advice America, worlds leading provider of financial advisor software solutions.

HAVE EMERGENCY FUND IN PORTFOLIO

Having an emergency fund in your portfolio is an ideal way to tide over a family crisis or meet unexpected expenses. Therefore, the need for maintaining emergency funds has always been emphasized by our forefathers. Even standard financial principles suggest that you should keep aside cash to cover three to six months of living expenses, which would also be able to cover most emergency expenses. Your emergency funds can also come handy in case of a job loss, says Ashish Kapur, CEO of Invest Shoppe.

ORGANIZE YOUR FINANCES

To those who are not used to monitoring and managing their finances closely, this may sound like a lot of work. But once you get a system in place, it should only take a bi-monthly monitoring to stay on top of everything. Ensure that you maintain sufficient liquid funds for emergencies. Also, monitor your loans and ensure that you make credit card payments before the due date.

LEARN TO PLAN AHEAD

Its no secret that poor planning contributed to why so many people are currently in weak financial situations. However, dont panic. Figure out where you are, where you want to be and put in place a realistic plan for getting there. Unique circumstances will come up and cause you to stray from your plans temporarily, but structure is necessary in order to monitor your progress and stay focused.

INVEST SLOWLY & SYSTEMATICALLY

The problem for many people is that they live month to month and dont develop healthy saving habits until they are in their thirties or forties. Contributions to a savings plan should be recognized as the first of your necessary monthly expenses, so that money saved will never be thought of as money that can be spent. Even if you start saving in small amounts now, you can always increase in the future, says Navlakhi.

TAKE CONTROL OF YOUR INVESTMENTS

The worst thing you can do in a slow economy Panic and pull all of your money out of your investments! Therefore, resolve to protect your finances as the market storm rages on. Take this time to build up your emergency fund, and set reminders to regularly review your portfolios asset allocation. Try to align the same with your mid-term and long-term goals. Do not get distracted by the usual city traffic jams when your final destination is miles away, advises Atul Surana, certified financial planner, Catalyst Financial Planning.

HAVE REALISTIC EXPECTATIONS

Theres nothing wrong with hoping for the best from your investments, but you could be heading for trouble if your financial goals are based on unrealistic assumptions. Therefore, when Warren Buffett says that earning more than 12% in stock is pure dumb luck and you laugh at it, youre surely in for trouble!