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| October 7, 2022

How to manage Finances smartly in uncertain times?

The only thing constant in our lives is change and the faster we accept and understand it the better can we be prepared. Some things are under our control and some things aren’t. And one of the things that we do and can control is financial resource management. We are living in a volatile world where things are changing quickly and unexpectedly. Just worrying about managing your money but doing nothing about it further complicates your future planning. Smart and prudent finance resource management is the key to making informed decisions, mitigating risks, and ensuring future financial stability. Take, for instance, volatility in the stock market. When the stock market crashes, it gives anxiety for many people. However, a prudent investor would see it as an opportunity to buy shares at highly discounted prices. Others might feel happy to keep their money in ‘safe and secure assets such as fixed deposits. Fixed deposits today aren’t as lucrative as they once were but people would much rather keep their money safe than grow it. How you manage your money when you are earning is often the determining factor in how you will live your life when you are not earning. Getting comfortable with finance and management comes with financial literacy, awareness, and practice.

Types of Uncertainties

Life doesn’t come with a user manual and so doesn’t the unpredictability of an unforeseen future. We can hope for the best but prepare for the worst. The term ‘uncertainty’ could mean different things to different people but it can be classified into three broad categories. Psychologist Paul K. J. Han has cataloged three types of uncertainty: probability, ambiguity, and complexity. The thing to note here is that as the factor of each certainty is not the same, the impact and consequence will also not be the same.

  • Probability: It’s related to those situations in which it isn’t possible to weigh the level of risk of a situation or a decision. A serious illness could be an example of this. We could all the information about the illness and its treatment but we can’t be sure of how the patient will respond to the treatment.

  • Ambiguity: It refers to those situations where the result or consequence of a decision is doubtful due to a lack of reliable information. For example- A new line of treatment for a particular disease where the efficacy of the treatment hasn’t been sufficiently proven.

  • Complexity: It refers to a new or uncommon situation and there isn’t much experience with it. For example A new strain of the COVID-19 virus.

The above applies to financial management as well.

How to Prepare For Financial Uncertainty?

In all kinds of uncertain situations, money is dominant if not the only factor. Here are a few ways to align yourself before you start planning and managing your financial resources:

  • List Your Financial Goals: This is the single most important step in your financial plan. The answer to WHAT you want to achieve paves the way for HOW to achieve it.

  • Understand Your Money Mindset: Our circumstances, emotions, and financial mindset have a deep impact on the path we take to manage our money. Say, if you get anxious at every stock market crash, you probably aren’t very comfortable with high-risk investments.

  • Understand Your Attitude: Are you disciplined and consistent in general or do you respond and react as the situation demands? Your money management attitude is reflective of your attitude and temperament to a great degree.

  • Review Your Lifestyle: Do you want to maintain your current lifestyle or would you like to make some changes? Lavish or restrained- your lifestyle goals could determine how you should manage your money.

  • Needs of Dependents: It is important to understand how and to what extent you are willing to provide for your dependents. It plays a huge role in your financial planning.

How to Manage Finances Smartly during Uncertain Times?

Unfortunately, when it comes to the management of personal finances, it is usually “I’ll deal with it later.” Don’t wait for a crisis to hit to start planning for your future. Money management doesn’t have to be complicated but it does need discipline and determination.

  • Calculate your monthly expenses: Your fixed monthly expenses like bills, rent, electricity, school fee, etc don’t vary much. For a month, make a note of every single expenditure, however minuscule it might be. You will be surprised to see how much it all adds up to be.

  • Create a Budget: The importance and fruitfulness of creating a budget can’t be stressed enough. One of the best ways to save and manage your money is to stick to a budget. There are numerous budgeting apps that you can use to monitor your earnings and spending.

  • Save and Conserve Cash: Ideally, you should be able to save 20% of your income. A review of your budget can give you an idea about how and where you can cut down expenses. Say, rather than eating out four times a week, you could reduce it to two times. Not giving in to impulses like online shopping is another way to conserve money.

  • Build an Emergency Fund: An emergency or contingency fund is a saviour during financially trying times. Even a small contribution every month can get you a sizeable corpus in a few years. This is the power of compounding. Remember, an emergency fund should be highly liquid and available instantly when you need it.

  • Get Insurance: The recent pandemic showed the fickleness of human life. We lost many loved ones. Health insurance will take care of medical needs and a life insurance policy ensures that your family is well-taken care of when you are gone.

  • Track your CIBIL Score: Try never to delay or default on credit card and loan payments as it adversely impacts your credit score. And this could become a problem if you need to take a loan later to meet financial exigencies.

  • Avoid the Debt Trap: Buy Now Pay Later (BNPL) schemes, sale offers, and reckless credit card usage to fuel impulse buys could spiral into a debt trap. And in these uncertain times, piling up on debt can throw your finance management off track.

  • Passive Income: Uncertain and volatile times could mean job losses, shutting down of businesses, etc. Try and develop a secondary source of earning to help you get by in the event of losing your primary income source. It could be taking up a part-time job, freelancing, building an asset like a rental property, etc.

Being prepared for an eventuality is half the battle won. A financial plan is nothing but smart and strategic management of money considering future assumptions, based on your financial goals. And a prudent personal finance management plan needs regular monitoring, evaluation, and adjustments based on changing current and future situations.

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