Five personal finance resolutions in 2012:

Many new resolutions must have been broken or forgotten already by the end of just second week of 2012. But we all like to start afresh guided by a persistent willingness every time, don’t we? The plan of starting anew provides motivation for any individual to bring about a change in any aspect of life which he/she is not satisfied with. More so, in financial matters because financial worry (severe or mild) is something which plagues every individual. So let us resolve to put our finances in order from 2012.

1.  Review your finances regularly & keep a record: First and foremost, inspect your finances. This exercise includes reviewing your investments, insurance, liabilities and monthly cash flows. This will help generate a view on your financial position and determine your net worth (Financial Assets – Liabilities). You can classify your resultant net worth figure into long term and medium-short term savings. Long term savings will include investments in PPF, NSC, EPF, long term bonds, pension scheme, etc. Medium to short term savings include bank savings, fixed deposits, stocks, equity and debt mutual funds. You can make a habit to review your net worth on a monthly/quarterly basis in an excel sheet and track whether it has grown or declined.
2. Organise your financial documents: Misplacing financial records including insurance policy documents is a common mistake. It could add to unnecessary stress if not found at the crucial hour. Make sure you keep all your financial records at one place. Get into a habit of filing records. You can categorise them into banking, investments and insurance. Intimate your family members about the placement of the financial documents so that they do not have any trouble finding them in your absence.
3. Journal your expense and stick to a budget: You might have some idea about the extra money going out of your pocket during these inflationary times. If you keep a record of every dime spent you will be able to curtail unnecessary spending over a period of time. Journaling your monthly expenses will enable you to get a better grip over your finances. (Know more about budget management in my article dated 8 June, 2011 titled ‘Where is your money going?’)
4. Create an emergency fund: Set aside some funds in the event of emergencies like a medical situation, loss of job, etc. During unfortunate situations, people usually end up redeeming their mutual funds (invested to meet long term goals) or breaking fixed deposits. An emergency fund will help to tide over difficult times. These should not be touched for your day-to-day routine spending. (More on emergency funds in my post dated 16 November 2011 titled ‘Do you have an emergency fund?’)
5. Dump your expensive insurance policies: Do not jumble up your investment and insurance goals. Risk planning should include buying a cover for loss of human life. The loss of life and its financial implications should be considered for a family while buying a life insurance cover rather than investment returns. Term policies are the cheapest and purest form of insurance for this purpose. Investment planning should include saving and investing in equity and debt instruments for meeting short and long term goals of life. Avoid investing in insurance plans that have an investment element. They are expensive and offer mediocre returns compared to regular investment options.
6. Invest in equities: This is the best asset class to beat inflation over a long period of time. If you have investible surplus not required for at least five years, then you will be able to ride the volatility in the stock markets better and yield attractive returns. Investible surplus here means corpus created after meeting household expenses, EMI, insurance premium and other general expenses. The savings should also discount the amount required for any medium term goal like buying an asset or funding child education.

Taking full charge of your financial matters cannot happen overnight but small steps taken will surely bring about a visible change over a period of time. Getting a complete grip on your finances will enable you to plan your future finances better. I wish all my readers a very Happy New Year and Happy Financial Management in 2012.

Do you have an emergency fund?

To the above question, the most answers I receive are a big yes. However, I realise that most people do not understand the concept of emergency funds in a real sense of the word. Many people equate emergency funds to a common savings bank account or a salary account. Sadly, they operate the same account for cash withdrawals to meet routine expenses. The bare minimum amount keeps on fluctuating in the so called emergency fund kitty and is refurnished for a brief period when salary is credited in the first week of the month. Let us discuss the real purpose of these funds, how much is adequate and where to park them.

Significance of emergency funds: These are required in the event of unfortunate situations that life throws at us. It could be a medical crisis or a loss of job or something else. After the Global Liquidity Crisis of 2008, many employees in the IT and Finance industry were handed the pink slips. Many people take job security for granted and hence are not prepared for these kinds of situations. During a medical emergency in a family, liquid money is required even if one has bought a mediclaim policy and opted for a cashless settlement. This would be to clear ambulance charges, day-to-day medical expenses, initial diagnosis, etc. Certain hospitals even ask for a refundable deposit before settling the dues with the insurance company. During such difficult times, people usually end up breaking their bank fixed deposits or redeeming mutual funds or making huge payments by credit cards. An emergency fund helps to sail through critical times. It should thus be given precedence over your regular investments being made in equity, gold or debt instruments.

How much is sufficient: An emergency fund should cover house hold expenses of six months. This includes the groceries, utility bills, entertainment, children’s school fees, EMI,etc. It should also take into account medical emergencies as mentioned earlier. For any individual, the probability of using an emergency fund during a health crisis is higher in a lifetime than for any other situation. It could be normally about Rs.2-3 lakhs. However, it may vary from family to family. For instance, there are families where many members have chronic health problems or some have 2-3 senior citizens or some do not have adequate medical cover, sometimes none at all. Such cases warrant a higher emergency fund. The fund amount can be gradually reduced once sufficient medical cover is purchased.

Where to park emergency funds: The prime reason of maintaining an emergency fund is that an individual has access to instant cash during an unfortunate event. Liquidity and safety are the key things here rather than attractive investment returns. So, the best option to park emergency funds is a savings bank account. Another option is flexible fixed deposits with auto renewal option and linked to a bank savings account. One can break the FD during emergencies and withdraw money instantly using an ATM card. You can also split the money and put 50 per cent in a savings bank account and the rest in a flexi-FD.

Although the returns from short term liquid mutual funds will be comparatively higher, they are a riskier option. Redeeming them will take 24 hours at least (even more if it is a public holiday the next day) and the whole purpose of maintaining an emergency fund will not be served.

Before you park emergency funds, make a list of the nearest bank branches from your home and/or place of work and enquire about the ATM withdrawal limit. Distribute the emergency fund amount in at least 2-3 branches so that you can withdraw maximum amount through your ATM cards on a single days. Use the emergency fund amount for urgent crisis-like situations only. It should not be touched for your day-to-day spending affairs. More importantly, replenish you contingency fund once the emergency has passed.

Where to invest your retirement corpus?

This post is in continuation of my earlier article dated 17 September 2011 .......

http://www.moneyihub.com/start-planning-for-a-financially-stress-free-retired-life/

While it dealt with estimation of retirement corpus, the article link below discusses the investment options to deploy your retirement money.

http://www.moneyihub.com/investment-options-for-deploying-your-retirement-money/