Action Plan for Personal Finance

An action plan is a road map for the achievement of some important goal. Most of us have some personal goals but we are often found falling short of the action plan to pursue them. With this article, we hope you make å smart action plan of your own and follow it.

Make A Successful Action Plan:

Before we take about the key actions you should explore, let us ensure first ensure that the entire ritual does not fail and the actions we decide to undertake are successful. Here are the four steps that will go a long way in ensuring your success...

1. Consider only a maximum of three actions. Even one to two actions is good enough as too many actions are hard to cope up with and you may lose focus and passion with time.

2. Make sure that the chosen actions are worth your time, holds your interest and passion, is on top or requirement and is also practical and meaningful for you to implement.

3. Ensure that the actions are well-defined, measurable, time-bound and in numbers. This will give you a very definite idea of the target and will help success instead of having to live with vague, subjective interpretations. Note, we have given open-ended actions below which have to be well-defined by you.

4. Make yourself accountable by sharing your actions with others and also maybe asking others to keep track of the same. Your spouse, children, parents and even friends and bosses can be made asked to keep you on track and support you.

Its' time now to explore a few suggested personal finance actions we hope you will make and also follow through.

Invest __ % More:

If you are a regular investor and think that you do enough investments, this year do more than enough. Resolve to invest a certain extra percentage each month this year. For example, if you invest Rs 10,000 each month, invest 10% extra, which is just an additional Rs 1000, which you can manage. At the end of the year, you will have invested an extra Rs 12,000. If you are yet to start saving, this action should be also at the top of your list.

Know that while you can come up with 100 reasons to avoid investing more right now and plan to invest more in the future, you just need one reason to start investing more from now. And believe us, there would be many compelling reasons for you to start saving. However, investing in the right product is also crucial. Equities give us the magic of compounding over a long-term, and its something that you should also explore. Remember, even if you invest a higher amount later, you will not be able to beat the returns of compounding you will generate on the smaller amount over a long duration of time.

Be adequately insured for all risks

When was the last time you carefully looked over your insurance coverage in a comprehensive manner? It is important that you keep on checking on your insurance coverage and making adequate changes in same. Evaluation of comprehensive coverage will require you to assess insurance coverage for life, health, personal accident, critical illness and home insurance. The idea is to protect the financial well-being of your family in case of any death, disease, disability or damage to property. If you haven't explored insurance in depth, resolve that you will do so asap and get adequate coverage.

Keep an Emergency fund of __ months income:

Life is unpredictable. You never know what will happen next and you might need money for some reason. Medical emergencies, unforeseen expenses which are unavoidable, sudden cash crunch, an urgent requirement for working capital etc. Thus, it is important that you have some amount set aside for emergencies. If you don't already have an emergency fund, it's time to start building it and if you have one, add a little more money to it. Typically, an emergency fund of three to six months of your income or expenses should be adequate enough for you.

While we are strictly against money lying in your savings bank account earning nominal interest, we advise you to build an emergency fund nonetheless and keep this money in a liquid mutual fund or a savings account.

Cut expenses by __ %

The main culprit behind low savings and an unhealthy financial situation is often our spending habit. There is often a disproportionately high expenditure on discretionary expenses. Expenses on entertainment, shopping, purchase of gadgets, frequent mobile upgrades, etc play havoc on our finances beyond our imagination. One action that you can explore is to track these expenses on a monthly basis by recording it and then planning the same from next month onwards. We do not ask you to say 'no' to everything, just put a limit in place, relative to your income and your saving plans. With this action, we can easily cut about 10-20% of our expenses every month. Remember, a penny saved is a penny earned.

Cut your debt portfolio by __ %

An easy and hassle-free loan is both a boon and a curse. While the availability of easy loan helps one through difficult times, it might sometimes also lead to unnecessary consumption. This is one of the reasons why people should shy away from taking credit cards. What people actually need to do is be smarter with their consumption pattern. Should you take a high-interest personal loan for a vacation? No. But if needed, should you avail an education loan for your kids? absolutely Yes. This year, learn to make a differentiation between good and bad debts. Good debts help you build assets, improve stature (like home, education) and are of low costs. Bad debt is often towards depreciating assets or intangible experiences (like car, travel, gadgets, etc) and often are of high costs (like CC, personal loans). This year resolve to clear your debt portfolio of all the bad debts first and then good debts, if possible. Being debt free by the year end can be a great action.

We sometimes get sizable cash inflow as windfall gains or bonus for salaried employees. The first question arises in our mind whenever we have a big cash inflow is whether to invest that amount for future or pay off existing debt to reduce EMI burden. We always feel like being caught between the devil and the deep blue sea.

Paying off debt and investing for future, both are important financial aspects of life. Paying off debt will help to reduce EMI burden and therefore improve your cash flow condition, and investing for future is beneficial for obvious reasons. Any rational human being will think about getting rid of debt as soon as possible, being debt free leads to healthy financial life.

But not always. Two important things to consider is potential cost of your debt and expected earning from your investment.

Compare Earning Against Cost:
One of the most common approaches to tackling the question of debt repayment versus investment, is to compare the interest rate of your debt to the returns on your investments. In general, high-interest loans that exceed your investment earnings should be paid off first. Likewise, if you have low-interest debt, greater benefit might come from making the minimum payments and putting more money into your investment accounts. Let me put it this way. e.g. If you have an outstanding loan on which you are paying 15% interest and you have an option to invest in a product which has the potential to generate 15% return, which one is better? Paying off debt will ensure you saving of 15% while investment has the possibility of generating 15% or even lower or higher return. There is an element of uncertainty here. This is something that you have to decide as an individual.

Consider the Type of Debt:
All debt is not equal. The type of debt you have, can play a role in the decision as to whether to pay it off as soon as possible or put your money towards investments. High-interest loans that are not tax deductible, such as credit cards, car loans or personal loans, should be paid off as quickly as possible. Other type of loans like mortgage loan taken to buy house or education loan for which you get tax benefits are in fact good to carry on as typically they come with lower interest rates and real cost comes down even further after taking tax advantage into account. Typically, a 15 year home loan costs you around 9.5 to 10%, this rate further comes down after considering tax advantage on that.

Determine Your Goals:
Everyone's financial situation is unique so it only stands to reason that your personal financial intentions will play a part in your decision. For many people, being debt-free offers a sense of relief that can't be quantified. For others, having an emergency fund that will cover eight months of expenses helps them to sleep at night. Emotions can sometimes overrule logic when it comes to financial decisions.

Depends on Human Psychology:
Human psychology also plays an important role in financial decision making. Certain class of people who are typically risk takers prefer to continue with debt and like to utilize funds available for investment to generate better return, even if it comes with risk. e.g. entrepreneurs, businessmen. They will always love to put that money in their business or in an investment product, which has potential to generate return over and above the interest paid on outstanding debt.

Strike a Balance:
You can also choose to make part payment of outstanding loan and bring the EMI down, as most loans are charged on reducing balance basis. So if you make part payment of outstanding loan, your EMI can come down to that extent. The remaining amount you can use to make investment.

e.g. You have 2 lakh outstanding in car loan and you get 2 lakh as some cash inflow. Should you use entire 2 lakh to pay off outstanding loan. Rather you can use 50% of the amount to pay off debt and bring down you car loan EMI and remaining 1 lakh can be invested for future.

The Bottom Line
There is no 'one size fits all' solution to the question of whether it is more important to pay off debt or invest. Every individual has his/her unique financial situation, which needs to be considered before taking any decision. e.g. if you have not created any emergency funds, utilize available money to put aside in short term bank FD or money market mutual funds so that can be used anytime if emergency arises rather than paying off debt.

If you find it really confusing to decide, try tackling both at the same time by making part payment and part investment or put your focus on financial goal to gain peace of mind.

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Schools will soon be closing for summer vacations, and we don't want our kids to kill their time and strain their eyes watching TV, or pestering their grandparents all day. So, most parents would be contemplating to send their kids for dance, music or painting classes, or may be enroll them for summer camps, or for vedic maths or abacus classes to advance their number skills. We want them to do something concrete, to keep them occupied, while they pursue a hobby or build their extra curricular skills or social skills. However seldom we would touch upon their financial management skills.

Vacations is a good time to introduce your kids to money skills and in fact setting the path for growing of a financially savvy individual. We have listed down some activities that may be helpful in putting the vacations to some constructive use.

Teach the money cycle: The rudiments of financial literacy lies in the money cycle: 1. Inflow of money 2. Spending 3. Saving. This summer, the first thing you can do is explain the concept and elements of the money cycle to your kids. To secure your child's interest, you can use various techniques for making learning more fun for the kids. You can engage them in a daily activity like cleaning their room, or watering the plants, or reading a book and attach an allowance on completion of the activity. You can also give them an allowance on special occasions like participating in a marathon, or helping mum in the kitchen if guests arrive, or for eating spinach in dinner, and the like. Also you must keep in mind, that you give them only as much allowance as you mutually agreed initially, stick to your policy, don't fall for those cute faces, 5 Rs for cleaning the room, so be it 5 only. Next ask them to write their goals, like what are they planning to buy from the money they get, at the end of the holidays. Guide them in developing their savings plan so that they can have enough money to fulfill their goal. You must continuously monitor their finances, and poke them if they are overspending. These activities are thrilling, kids will be motivated to work hard for more allowances and saving from their allowance since it is taking them closer to the their military gun, or a pair of skates, or whatever the goal is.

Make them your grocery shopping partners: Whenever you go for grocery shopping, take them along. Involve them in shopping, familiarize them with the information printed on the package and that it should be checked before buying the product, like MRP, expiry date, etc., let them check the price of each product you pick and also of the alternate products that you skip. They'll get an idea about the price of the products that are consumed in the house, the price difference between a Ferrero Rocher and a Dairy Milk chocolate, the effective cost of the product if you purchase combo packs, etc. At the end of the shopping, ask the kids to crosscheck the bill with the items purchased.

Keep them involved in the entire shopping process. This activity will give them practical exposure, it will teach them that things come for a price and will inculcate prudence from a young age.

Teach them entrepreneurial skills: Vacation is also an opportunity to let your kids taste business skills. The kids can set up a stall like a golgappa stall, or a sandwich stall, or a candle stall in any event that's happening around, like your society or a fete or a mall, etc. Let them do the purchase of the raw material, processing of the product, setting the price of the product, do sales, etc. The level of responsibility should depend upon the age of the kid. At the end of the day, if they manage to make a profit, it shall be deposited into their piggy bank or their saving account. This exercise will help them experience the thrill of business process, it'll be their first steps to learning business sense.

Money Games: There are a plethora of money games available for different age groups of kids in the market, on various subjects like stock exchange, piggy banks, business, saving, setting of goals and working towards them, etc. Kids have an appetite for games, a fun and engaging money game can be a good way to capture their interest and inculcate financial instinct among your young ones. You can research a bit and then buy few good money games for them in this vacation.

Gone are the days when kids were excluded from all financial discussions of the house, today parents make an effort to make their kids financially aware, so that when they enter into the mature world, they are not at point zero because the first thing they are going to face is money. So, this summer vacation, carve out some space for financial literacy from their activity schedule.

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Saving money is one of the most important part of ­financial management for individuals and families. Our spendings have a direct impact on our savings but unfortunately, controlling spendings is a challenge for everyone. Many of us believe that saving money is a methodical, disciplined and largely a left brain process. But it is not entirely true and saving money does need a lot of thinking and creativity.

The real challenge with most of us is to be able to think long term, plan for it and ­finally put enough efforts to achieve it. Therefore, the task of deciding how much to spend directly falls on the head of the spender. Here are a few well known tips on how to save more by controlling spendings...

1. KEEPING A BUDGET

Yes, the same old budgeting technique has gained much more prominence today where credit cards often encourage useless spending. Try budgeting for savings instead of spendings, for a fresh perspective. It will automatically force you to limit budget for spending. Hopefully, you may limit spendthrift activities and impulsive buys as the ­first step.

A creative idea for managing spendings is by maintaining a separate bank account for only spendings. Monthly you may transfer a fixed amount for planned spendings to this account from your income account. One part from our income account will go to savings as planned. This will automatically enforce discipline in managing budget.

2. PROCRASTINATION

Usually, procrastination is found to a useless and typically unproductive habit. But, used at the right place it can be as useful as the methodical thinking, and that right place is the time of spending. When running on the budget above, it’s easy to ­find yourself depleting that ‘spendings account’ before the month ends and then ­finding yourself in the fray with the products you really wanted to buy nowhere to be seen in the order list.

The trick is to procrastinate the use of ‘spendthrift account’ till the ­final days of the month and soon you’ll ­find that your savings are increasing at an increasing rate, and your order-list is full of necessary items you always wanted to buy. Procrastination is a good habit when it comes to spending on things which are not important or urgent.

3. PAY BILLS AUTOMATICALLY

There are wonderful features now a days on your online bank accounts that can help you save a lot of money you end up paying in penalties for late payments (because most of the time the bank account goes empty before the due date). Auto payment of the bills; i.e. postpaid phone bill, electricity and credit card bills, can save you from frequently paying those unnecessary penalties on late payments. Also, it’ll reduce your account balance in time, allowing you to spend only as much as you should and create another barrier to spending.

4. MANAGE CREDIT CARDS

Now we come to the hard part, credit cards you so dearly love and use, not just to buy the favorite weekend dinner or movie tickets, give wings to your spending, and if spending gets the wings they are sooner or later bound to go out of control. Therefore, you are left with two options with credit cards:

A You can pull your socks up and start managing your cards meticulously, or

B You can go ahead and switch to Debit cards. (yes, it means surrendering your credit card)

So, which one should you follow? Depends completely on your personality. If you feel that you are one of those people who love discipline, planning and are patient with money, you can easily manage your credit. On the other hand, if you like to call yourself creative, love living in the moment and being spontaneous, credit cards are perhaps not a useful choice for you (though, there can be exceptions).

This step is important, because your credit card can easily make or break your credit score. Credit cards are best and perhaps the easiest way to build a good credit score, all you need to do is take care of the following:

• Have a total credit limit no exceeding your annual income on all your credit cards combined,

• Use only up to 70 - 75% of the total credit limit in any billing period, Ensure that you are always able to pay in time, and

• Ensure the amount spend is always paid in full in the same billing period.

This may sound tough for the right brainers though, and if it does you may follow the tricks given below and still manage to keep a credit card.

• Spend only as much you can repay at the end of the billing period.

• Tally the credit card transactions and your bank balance regularly. Check past records to see how much you can actually spend through credit card.

• To save miscalculations switch to bill payments for phone and electricity through credit card.

5. LET SOMEONE ELSE DECIDE

This may sound strange but, it is a very useful and stress-free method of making your spending decision. There is one limitation however, you cannot bank on the stranger for each and every small expenditure, and neither would you like the control the stranger may exercise on your expenses. The way to solicit the stranger’s help in controlling your expenses is to get a comprehensive plan and let the stranger tell you how much you can spend in each of the months. That stranger, will usually be your ­financial planner or wealth manager, and will provide you a comprehensive roadmap for not just future but also the present. Knowing what is important and what is not, setting your priorities based on factual data and numbers and not on feelings and impulses will certainly allow you to achieve the self-discipline needed to control the spending.

OTHER INTERESTING METHODS

If somehow you find accepting and applying any of the methods above, yet you still want to be able to control your spending there are more interesting and rejuvenating ways to do that:

A] Spend time prioritizing & planning: A weekend exercise each month or every two months will take you long way towards family bonding and spending your money in far more useful and satisfactory manner.

B] Think Long Term: Long term success requires short term sacrifice and the same is true for money as well. If you have bigger long term goals spending control in the short term is very important.

C] Use SIP Mode: SIP mode of investment, or Systematic Investment Plans can be useful in diverting your money towards savings each month before you can think of spending it. Plus, you have added advantage of performance if you are investing in Equity Mutual Funds.

D] Use Your Recording Skills: No need to be surprised here, recording skills mean recording transactions not the video recording skills. All you need is a notepad on your smart phone or a small notebook and a pen at the end of the day and less than 5 minutes of time to record every expenditure you incurred throughout the day. Best way is to use a spreadsheet on your cell phone or laptop, where you can enter the bank balance at the top (in negative) and then record the spending every day with a total being displayed at the bottom. This, will keep telling you about how close you are to the limit you have set for your expenses. Additionally, if you want to get creative, spreadsheets can be wonderful in reflecting your income-expense status. You may add pie charts (see ­gure: “Spending Chart”) and actually use the data to tally with your bank statement, giving you a comprehensive picture of where your money goes and where you can control its ow.

E] Make a List: Prepare a ‘Go Get It’ list before you go out to shop. It is an old but powerful tool to get hold of your purse each time you get attracted to a new arrival at the superstore, or the new advertisement for the same old non-useful product you already own. With these many weapons at your disposal, it shall be easy for you to conquer the spending territory. Additionally, you can try finding your very own creative ways to control your spending and credit yourself with successfully defending your money later.

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