Today most of us have made much more money than we thought we would make! Surely some of my classmates (ok just a couple of them) with a net worth of Rs. 200 crores plus are kidding themselves if they thought they will make so much money. Frankly when we started life after getting our degrees, if somebody had asked us we would have happily ignored the zeros and been happy saying – “if we have 2 crores when we retire, we would be thrilled”. However today I meet fund managers with Rs. 30 lakh salaries (and Rs. 2 crore bonuses) as well as school teachers with a Rs. 120,000 annual salary. Frankly I cannot say who is more at peace with themselves. However each one of us has to decide how to deal with our monies.
Money is such a personal issue, that if your portfolio manager has created a portfolio that is ensuring that you are awake at 3am, your portfolio is wrong. So the question to ask is “How well does your finance let you sleep?”
Once upon age of 45 was the age to do regular health check ups. Now it is perhaps 30 years when you should be starting your regular medical check up. However, a financial check up is necessary from the day you take up a job – or you take up a loan.
1. Which is the breaking point for you?
What would happen if you got a big bill for an unexpected expense? In other words, what is the last straw for you? Will it break you? Your personal financial situation is a lot like that camel. If you are on a tight leash – say the EMI is taking 45% of your take home pay. A small increase in the floating rate can be the last straw. If you are on solid financial footing, you can bear the burden of your daily bills and afford an unplanned trip to the local auto mechanic to put a new fuel pump in the car.
On the other hand, if one, big unplanned expense would throw your life into disarray; it is time to take a closer look at your lifestyle. While you may be comfortable today, if a single expense is all that stands between you and financial disaster, you are heading for trouble, and you need to take steps to avert it before it arrives.
2. How many months can you live without your income cheque?
What would happen if your next salary cheque does not come in? Or even worse, your company told you a great tax saving device – of being on contract? It means a stroke of jaundice or even a fracture can mean no income for a month at least! Will you be evicted from your house? Will the bank foreclose your home loan? Can you afford to send money to your parents? Or to a younger sibling whose education you are funding? Bluntly, how long can you afford groceries? If you cannot live for at least 4-6 months if you suddenly stop collecting your salary, you have a serious problem that needs some serious attention.
I would list the creation of an emergency fund as a critical part of a sound financial plan. Putting three to six months’ worth of your income in the bank (floating rate mutual fund for some people) so that you have it on hand should you need it is a great way to give yourself some breathing room if your income come to a temporary halt.
3. Are you “maxxed” out?
Credit-worthiness is another way to gauge your fiscal health. Do you pay your credit card dues in full or do you pay only the minimum amount due? That figure appears in bold. Can you qualify for a loan? If you have high balances on your credit cards or cannot get a loan or another credit card, chances are that the amount you owe and the amounts you earn and save are out of balance.
“Income rupees one hundred, expenses rupees 99, life is fine, Income Rs. 99, expenses Rs. 100, life is in despair” – with due apologies to Charles Dickens!
Clearly if you are buying food, basic clothing, CDs, MP3, cell phone bills, electricity bills, with your credit card and paying only a portion of the bill on a monthly basis, you are living beyond, perhaps far beyond your means.
4. What about your savings and er..investments?
If you have enough cash on hand to address any emergency expenses, can afford to live for half a year without another income cheque and still have the ability to tap some credit, the next thing to consider is the amount of money that you are able to save and invest.
Is there anything left from your income after the bills are paid? Does your savings account always show some balance? Then you are comfortably off – at least you can start thinking about saving and investing. However if you do not have an emergency fund (cash or a rich dad) are maxxed out on your credit card, cannot get a new card and the bank thinks you are “negative” for a new card or a personal loan, man you are in trouble!
What to Do If You’re in Trouble
If you do not know the right answers to the financial checkup questions, you need to take immediate steps to get your financial house in order. The first step is to cut your spending.
Immaterial of how mathematically inclined you are, or disinclined you are, it is time you put all your numbers together and start living on a budget.
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