Loss in equity investments
Though Indian investors have matured since the 2008 recession, there is still temptation to redeem investments at the first sign of a market fall. “Investors should learn to respond, not react, to market movements,” says Dinesh Rohira, Co-founder, 5nance.com. So if you are a long-term investor in equity funds, don’t be concerned about short-term market aberrations. It is also important to check if the market, group and fund fundamentals are sound. “When you start investing, know your time horizon. Market corrections happen every 6-7 years, and if you are a long-term investor, continue with your SIPs,” says Financial Planner Pankaaj Maalde. Similarly for stock investors, if the company fundamentals are sound and the overall market is stable, there is no reason to worry about losses. “But if the rationale doesn’t hold any longer, you may book your losses and exit the investment,” says Rohira.
Run out of cash by month-end
If you run out of money by month-end due to low salary, there is little you can do except look for a new job or supplement your income. “For most, it has to do with improper budgeting and unstructured way of managing money,” says Rohira. Many people don’t even have a budget. Another reason is poor spending habits, wherein you either buy on impulse or do not differentiate between mandatory and voluntary spends. Thirdly, if you have a huge debt in the form of home, car and personal loans, it is bound to leave you scrounging for cash. To tackle this problem, first prepare a budget, marking out essential spends from discretionary ones. Once you have dispensed with the fixed expenses, spend whatever you are left with. “Make sure to invest 20-30% right from the time you start working.” says Maalde. Also, maintain a contingency corpus by saving at least three months’ expenses to deal with financial emergencies.
Inadequate corpus for goals
Vandana and Vikas Madaan from Noida planned to send their only child to Harvard. The child grew up believing this dream, qualified and got admission to the coveted university. “At the last minute, we realised that we would not be able to cover the living expenses and tuition fee in a foreign country, a sum upwards of ₹1 crore,” says Vandana. This illustrates the pitfalls of not planning for goals properly. “The first step is to be realistic about goals and prioritise them correctly,” says Maalde. The second, and the most critical, step is to calculate the correct future value of goals (see graphic) and invest for these well in advance. If you do run short of the corpus close to a goal, you can downsize the goal value and stick to debt investments for safety of capital.
Taking on too much debt
“Debt can be both a friend and a foe depending on how you manage it,” says Rohira. If you have taken loans to build an asset, such as a house, or are using your credit card responsibly to build credit score, then it is good debt. However, taking big loans or relying on an expensive personal loan to meet an exigency will strain your budget and cash flow. If you have too many loans, start by repaying the costliest one first (see graphic). “If you have an investment that gives a return of 6-7% and have a loan at 13%, redeem investment to repay the loan,” says Maalde. Also, ensure all your loans don’t exceed 40-50% of your income.
Spouses fighting over money
Financial incompatibility is not just a cause of stress among couples, but can also escalate into break-ups. “Discord often depends on whether both spouses are earning or only one. In either case, both should sit down, identify the sources of income, prepare a budget, and plan the goals,” says Rohira. “If both the partners are earning, a good way to avoid conflict is to have a joint bank account, to pool in money in the proportion that both earn, for common household expenses,” says Sunder. For their own spends, they can have separate accounts to keep the surplus. The danger of one partner earning and managing finances is that if one partner dies, the other is left clueless. Also, the spouse who manages money ends up dictating terms to the other. It is crucial that both are in the loop about all investments and expenses.
Unprepared for crises
A financial crisis can strike at any time sudden loss of job, death of the sole breadwinner in the family, a debilitating illness, or an accident. A good place to start is to build an emergency corpus. “If you are single, save 3-4 months’ expenses in a liquid asset. If you have a family, lock away 6-12 months’ expenses,” says Rohira. The next step is to buy health and life insurance. Whether you lose your job or are inflicted by an illness, it is important to buy an independent health plan. “You should also have a ₹25-30 lakh worth of critical illness cover as employers don’t provide it,” says Rohira. Adequate life insurance is also a must to protect your family against unexpected death.