Check borrowings: If one is broke, then in all probability it is because he is servicing a high cost loan. It is therefore important to check liabilities and the interest rate on each loan. The aim should be to pay off such high cost loans. An interest free loan from employer or from parents / in-laws is a good option to consider. Another option would be to port the loan to another bank which charges a lower interest. This may require payment of a onetime fee, but it may be worthwhile to consider this.
Pause investments: If one is in a deficit scenario, it makes sense to temporarily stop investments till a surplus situation is reached. This should be done one step at a time, moving from deficit to neutral and then to surplus. The extra that is saved because of not investing can be used to pay off high cost loans or reduce credit card debt. This will automatically reduce monthly interest outflow. One can continue tax investments if this results in savings, but again, this should not be done out of borrowed funds.
Cut back expenses, brutally: Yes, there is a need to be harsh on oneself and family till things become better. All unnecessary expenses should be reduced wherever possible. One should check if he can defer the expenses to the following week or month. Offers or discounts should be availed when it comes to essential expenditure. An example would be to consider online grocery shopping from a portal which offers discounts or reward points. Search for bargain shopping. In a liquidity crisis, if it means saving a rupee, then there should be no complaining in bargaining.
Additional income sources: In today’s world, it is possible to have an additional income stream, if one looks out for it. A part time job or part time tuitions by spouse are good options of having an additional income stream. Freelancing is another option to increase the family income. There are various freelancing websites which offer opportunities in different areas. Another way to boost monthly take home salary would be to evaluate the salary package and see if all tax benefits are being made use of.
Can investments in assets be partially withdrawn: Although this is not usually recommended, one can assess if he can take a loan or partially withdraw from fixed deposits or PPF. If there are high cost loans, then this money can be used to pay off such loans. ULIPs which entail payment of huge premium can be stopped or withdrawn. The help of a financial planner can be sought to understand what works best.
Start small: When the financial situation improves, it is recommended to start regular investments, even if it is a small amount. Saving even a few thousands every month can go a long way in building a huge corpus - such is the magic of compounding.
The idea to deal with investing when one is broke is to stop investing till the situation becomes better, set right assets and liabilities, cut back expenses, look at ways to increase income and then start saving regularly when the situation improves, albeit in a small way.
This article was originally published on Moneycontrol
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