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7 tips for achieving financial security
Every cloud has a silver lining. The recent global economic slowdown too has reinforced the virtues of austerity.
But you don't have to wait for that big stock market crash or the next big bank to go kaput to strengthen your financial immunity. Here are some tips to help you ensure your finances stay strong come hail or high waters...
1. Make austerity a habit
This is a lesson most Indians don't even need. But for those who do, living within your means is the best way to counter any headwinds in the larger economy. Stay debt-free, avoid luxuries you cannot afford, avoid wastage and expenditure that can be avoided and know where your pennies are being spent every month.
This way, even in times of high inflation, you will be able to absorb the price rise because you know where to spend and on what.
Try this test.
If there are multiple incomes coming in your home, try to live within just one of those incomes. This way, even if there are job losses in your family, you will be able to manage just fine and probably won't even feel the pinch at all as your lifestyle won't change much. And will also be able to stash the other incomes away for a rainy day.
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The author is co-founder and director of Bangalore-based Perfios Software Solutions Private Limited. www.perfios.com is a personal finance software solution that provides a 360-degree view of your personal finance, with very little manual intervention.
2. Being mad about money helps
Ever heard the story of the ant and the grasshopper? Be the ant, which worked hard when the sun was shining to stash food away for a rainy day. So when the economy is booming and you're getting a fat paycheck with hefty bonuses, skip the latest plasma TV and put it away for when the paycheck goes on a diet and the bonuses dry up.
Also remember to park these funds in 'safe' investment options. State-owned banks, government investment plans come readily to mind. While the stock market may give you great returns, it is usually the first to take a beating when the economy shows signs of nervousness.
Separate your extra loot into two categories -- one for riskier 'great returns' investments and another for 'safe but small returns' plans that can help you during emergencies and recessions.
Don't bank too much on property either. Rentals go south when economy does. So your real estate assets may not be able to cushion you in bad times.
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3. More (jobs) the merrier
When it comes to income, the more sources you have, the better. Time and company rules allowing, do learn to take on freelance work in addition to your full-time job. Many of us have talents that can actually be monetised.
Discover them and use them to build your bank balance.
This way, even if your main source of revenue, your job, goes, you will have something to fall back on. It also makes all kinds of sense to sharpen any hobbies you have and turn them into money-spinners. There are many Web sites that actually give you the opportunity to offer your expertise on a consultancy basis.
Get busy.
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4. Don't put all your golden eggs in one basket
The more the merrier rule applies here, too. Diversify your investments in different instruments and don't park them just in one. Debt schemes, equities, bank deposits, government investment plans, mutual funds, real estate, gold and silver, the list of places you can park your funds is long. Take your pick.
In fact, spread your investments in such a way that some are the kinds that do better in bad times and the others, in good times. For example, stocks and gold. This way, when the going gets tough, not all your investments will suffer. Some might even do well because of their safe-haven appeal: like gold and bonds. And some will go south together: like property prices and stocks.
The more diversified your investments, the more resilient it is to shocks as something will make up for something else. Do so while picking stocks, too.
Don't invest all your money in the sector that seems to be doing really well right now. Buy shares of companies in different sectors, including defensive ones that are unlikely to suffer even in bad times.
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5. Keep a squeaky-clean credit rating
If you find it hard to do all the above, this one is non-negotiable for you. Banks, in a pool called Credit Information Bureau India Ltd, or CIBIL, log every loan you have taken. This is your credit history so banks can check your records before they hand out any loans to you.
If you have defaulted on your previous loans, there will be a black mark against your name at CIBIL. This means you won't be able to get a loan to tide over bad times.
Moral of the story: keep your credit record squeaky-clean. Don't default on loan and credit card payments, see that CIBIL has updated records on loans you have paid off and keep your debts as low as possible.
You can get your credit report from CIBIL for a small payment. Do so to not only check for any inaccuracies but also to know how creditworthy you are and how easy it will be for you to borrow funds should you need them badly.
Remember that when there is slowdown in the economy, banks too get very possessive about their funds and lend only to those who they can trust, that is, those who have a past record of being trustworthy. Be one among those.
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6. Invest for long term
Your investments should be able to wait for economic headwinds to blow over. If you are a long-term investor, you can afford to not liquidate your investments and wait it out. Whatever goes up must come down and vice versa -- even if your stocks have plunged big time now, they will eventually rebound.
In fact, when the economy is suffering, get into the investment mode especially in instruments such as equities and mutual funds, which will be available cheaper then.
Being a long-term investor allows you the luxury of staying invested even if your portfolio has lost some value. When recovery happens, all this will reverse itself and the value of your portfolio will rise again. Keeping your investment horizon short means you may be forced to sell even when the value of your investments has fallen.
Take the long view to avoid the rush.
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7. Know how much risk you can take
A younger person with fewer mouths to feed can always take more risk than an older one with more responsibilities. This is why investment experts tell you to invest more in riskier assets when you are young and become more risk-averse as you grow older.
Do some introspection and ask yourself how much loss you can really absorb. If you happen to lose money you invested in the latest scheme, will you stay in financial dire straits for months? Or can you dismiss it as a bad experience and move on? Let your answer guide your hand.
Also know how much risk you are comfortable with. If you are a risk-averse person but have invested in a risky asset, you may give in to panic when market turns bad and end up with losses. Know thyself and make thy decisions accordingly.
Make the above suggestions a way of life, in financial sickness or health. That way, even Great Depression II won't be able to faze you or your banker. Your time starts now!