Prevention is better than cure, goes the saying. The same applies to your finances, too. Detecting problems in advance will help you save a lot of trouble later. Here are some telltale signs that indicate that there is a problem with your spending and saving patterns.
There is a problem with your spending habit if:
You don’t know what you can afford.
Problem: You got a bonus along with your annual appraisal and went ahead and bought a big refrigerator or a split air-conditioner to beat the summer or a car you had been eying for some time. What you didn’t factor in was the inflated electricity or petrol bills that may not fit into your monthly budget.
Solution: Planning and budgeting your finances is the only way to know what you can really afford. If you know what your monthly budget can afford, you would know what you can afford.
Every next month you find yourself in a cash crunch.
Problem:You went on a holiday one month and forgot to put aside some savings for the insurance premiums that you needed to pay the next month.
Solution:Account for your monthly as well as annual cash flows to manage your cash flows efficiently.
You are not being able to service your debts.
Problem:You bought four gadgets on equated monthly instalments and another on your credit card. After a few months, you find that you are not able to service all your debts.
Solution:All your loans put together should not exceed 30-40% of your salary. So keep that in mind before taking any new debt.
There is problem with your saving/investment pattern if:
Your portfolio doesn’t appreciate.
Problem: You did your bit and saved regularly, but when you came close to your goal, say, buying a car, you find that there has been hardly any appreciation in your portfolio.
Solution: Choose assets keeping your goals in mind. For instance, for a short-term goal, keeping all your money in equities may be very risky and you may find your capital eroded if markets fall.
You have too much of one asset.
Problem: Your equity investments paid off last year so you put all your money in the market. Or, you made huge losses during the 2008 crisis and now you are so wary, you stick just to debt investments. Either of the strategies won’t really work.
Solution: You may know your risk-taking capability, but putting all your eggs in one basket is definitely not advisable. Diversify to minimize risks and still be on the growth path.
You don’t understand the product you have.
Problem:You invested in real estate to make quick returns when prices were rising, but nobody told you it’s not a liquid investment and your money can get stuck in the absence of a good deal. Similarly, you have five insurance policies but still don’t have adequate cover.
Solution: When buying a product, know what purpose it will solve for you. Not all products are suitable for all needs. Having goals will sort out the asset choice for you.
Illustrations by Shyamal Banerjee