Managing one?s finances efficiently is extremely critical when it comes to financial planning. Imagine the case of an individual whose salary increases at a nominal rate every year whereas expenses rise at a faster pace due to high inflation. Such an individual is bound to face a financial crunch if proper planning is not done.
Similarly, assume you run a business which is dependent on consumer demand. A fall in consumer demand due to the above factors could cause cash crunch for your business. Hence, it is important to plan in advance to overcome such problems.
Here are a few ways to manage cash shortages:
Curtail unnecessary expenses: Any money saved is money earned. When you cut down expenses that are not critical, you save more. Make it a practice to purchase only those things that are essential and as per your needs. When you have sufficient money, spending on unnecessary things does not seem to cause a problem. However, in times of crunch, this only causes a further strain on your finances.
Apportion money for regular expenses: This follows the traditional principle of envelope budgeting. The difference is you do not determine the budget beforehand. Based on your past expense pattern, you set aside money for all expenses you can count and estimate beforehand.
For instance, assume you incur monthly expenses of R30,000 on EMI, R2,000 on electricity bills, R300 on gas bills, R1,000 for your maid, R20,000 as rent and R2,000 on your mobile and internet bills. These expenses are fixed and not expected to change every month.
Further, you know that these expenses have to compulsorily be incurred every month, irrespective of your financial position. When you add up such countable expenses, they usually form a large chunk of your monthly expenses. So, when you have some extra inflow in any month, you can set aside money for such expenses to help you in times of need.
Defer your expenses: Analyse your expense pattern and see if any of them could be deferred to a later date when your cash flow position becomes better. You will realise that there are many expenses that are not critical and can be done at a later date. For example, you may want to purchase a second AC for your house. Try to postpone the purchase to the winter season when the prices drop.
Maintain a contingency fund: You must plan to maintain a contingency or emergency fund worth at least six months? expenses. This will help you manage your expenses in times of a crunch. Remember to invest this corpus in a liquid fund that can give you returns and, at the same time, withdrawn any time.
Monetise gold: If you are confronted with financial issues, you can look at monetising the gold you hold. You can deposit gold with commercial banks in exchange of cash certificates that will give you fixed interest. This is based on gold holdings. Such a scheme will help you add anew income stream and ease your finances to some extent.
Generate funds from friends and family: If you think you have some commitments that cannot be avoided, you can try to arrange funds from your social circle, rather than approaching a bank for a loan. You will be paying more interest on a personal loan from a bank than what you may have to pay if you borrow from people you know.
Don?t disturb long-term investments: You must plan for goals based on their timeframe. For example, you should not fund a short-term goal with savings meant for the long term. However, in times of financial crunch, you may be tempted to let go of this discipline and draw from your long-term investments. As such investments are meant for the long term, the returns from these can be affected if you withdraw funds midway.
Planning in advance for adverse situations in life is the key to managing financial crunches. Maintain an emergency fund, cut back unnecessary expenses and save smartly to overcome financial difficulties.
The writer is CEO, BankBazaar.com
