How to avoid a personal financial crisis

Written by Vidya Kumar

January 6, 2014

Being in a financial crisis is not easy and one should take steps to avoid it. We have given some guidelines here to avoid a financial crisis –
Have a Financial Plan,  Assess your finances and review plan regularly, Live within your Means, Maintain a contingency fund, Make Smart Investments, Pay off Debts
Any one of us could be in a financial crisis if we are not careful. Due to tough economic conditions there are nominal increases in salary compared to the high inflation rates, there can be job cuts or slump in business due to lack of consumer demand. All these can snowball into a crisis if we do not plan. We give you some guidelines on how to avoid getting hit by a financial crisis.

Have a financial Plan – We have said many times but at the risk of repeating ourselves, we would say have a financial plan in place with assets, liabilities, income and expenses recorded. Ensure that you have insurance for yourself and your family. The plan should be made with considerations to life after retirement, emergencies etc.

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Assess your finances and realign the financial plan regularly– The financial plan should be periodically reviewed and updated. The plan should be revisited when there is an important event like a wedding, change of job, retirement, or starting your own venture. You then have to take stock of your financial situation, update expenses, income, debts etc. in the financial plan and have an overall picture of your current financial status.

Live within your means – You should have a budget and stick to it. You should keep a check on your expenses and ensure that they don’t go overboard. You can take a look at your bank statements and credit card statements to track expenses. If you find too many unnecessary expenses like eating out in fancy restaurants all the time or buying the latest gadgets too often, you should check yourself. These may not pinch your wallet now but these could be a reason to put you in a financial crisis or add to a financial crisis.
Do not use credit cards as far as possible and if you do use, ensure you are not late in payment of bills as this could result in penalties.

Maintain a Contingency Fund – Emergencies and contingencies take a toll on your finances. So you should maintain a contingency fund which takes care of about 6 months of your expenses. This money need not be idle cash. It can be in a liquid fund so that it earns some money and at the same time, redemption is quick in case of unforeseen circumstances.

Make Smart Investments – It is important to make investments judiciously. Invest in assets that are solid and secure and will give good returns. You should invest in different types of assets so that all your money is not locked in one or two assets and there is reduced risk of investment losses.

Pay off Debts – You might have EMIs to be paid on personal loans, credit cards, the car, house etc. Rework on the EMI plan and see if it makes sense to pay off some debts especially when you get some windfall. Reducing your debt levels will help in warding off financial crisis.

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