With an economy that has slowed down and shrinking earning opportunities, it’s possible that you could be facing a cash crunch. While it might seem alarming at first, with a little bit of planning, you could sail through this crisis. If you want to know how to plan your finances when there is a problem with liquidity, read on.
Your survival plan will be different from others since your situation is unique. The factors that need to be considered will be your age, financial goals, life stage (married with or without kids/single), and your current savings and investments.
Identifying Your Financial Goals
The primary financial goals that you would need to achieve include a retirement fund, higher education of your children, your first home, and staying debt-free. Calculate the future value of these goals with a financial planner. Find out how much you need to invest per month to achieve these financial goals.
These financial goals are your priorities apart from your essential monthly expenditure like food, clothing, and shelter. The first step to financial planning is creating a budget and identify any unnecessary spending. This would include shopping without reason, eating out regularly, or any other expenditure you don’t require.
If there is a shortage of funds for your essential monthly expenditure, you can use a line of credit. If you’re wondering what is a line of credit, it is a credit line card where you get loans ranging from INR 1000 to INR 500000. Unlike credit cards, you can withdraw 100% cash with these cards, and it’s like a personal loan.
These loans can be repaid over three years, and depending on your need, there is a top-up facility too.
Pay Off High-Interest Debt
The EMI you have to pay for high-interest loans taken through credit cards constantly puts pressure on your finances. While a part of your monthly surplus will be invested towards your financial goals, the balance should be used to pay off any existing high-interest debt that you have.
In case of credit card debt, try to come to a settlement with the bank and, if possible, pay it off as early as possible. If you have a sudden inflow of funds like an inheritance or a bonus from work, pay off the credit card debt.
There are cheaper loan options like credit line cards compared to credit cards. You can apply for loans by downloading an app on your mobile phone.
The best line of credit app would provide benefits like affordable interest rates, flexible repayment terms, load cash on the card in 90 minutes, and more. You can go online to find more details about credit line cards.
Create a Priority Pyramid
Once you have identified your goals, decide which goal is a priority for you. It could be your first home or higher education of your children or your retirement, not all three since you don’t have sufficient funds.
When you have identified your unnecessary expenditure, your cash flows will turn positive over time. With regular positive cash flows, you can start investing for your priorities. This will be easier since you have fewer goals to achieve.
If you feel that just jotting down your priorities won’t greatly impact you, then creating a priority pyramid would be a better choice. Your current wants will be at the top of your pyramid, followed by your long-term goals.
The next layer of the priority pyramid would be your short-term needs, like settling high-interest debt and emergency funds. The last layer would be your essential expenses like shelter, food, and clothing. Any costs required to earn your income like transportation or your computer (if you are working from home) come under essential expenses.
You can’t do without the pyramid’s bottom layer since these expenses are required for your survival. An emergency fund is also part of this layer. Your emergency fund size would depend on the stability of your job, an earning spouse, inherited funds, or interest income.
When the lowest part of the pyramid is completed, then you can start paying off high-interest debt.
Improve Your Earnings
If all the strategies mentioned above still leave you short of money, then you need to increase your income. You could try a freelancing assignment in addition to your regular job. If you are married, then both of you should be working to improve the financial conditions.
If you have a spare room, rent it out. Some companies want cars on hire, and this could be an additional source of income for you. You could go online and look for legal part-time jobs that will help you increase your income, like online tutorials.
Choosing Cheaper Options
Whether it is your home or your car, there are cheaper options that you can consider to improve your cash flow situation. If you are driving a medium-priced car, sell it off and get an entry-level car. Get a home in a cheaper neighbourhood or one that is well connected, so that you can travel to work using public transport and save on fuel costs.
The excess funds that you have after buying a cheaper home can be used to pay off your high-interest debts. You can invest more towards your short-term and long-term goals. This will help you become debt-free faster.
When you increase your income and lower your expenditure, your cash flows go up. You also need to be disciplined financially so that you don’t fall back into a debt trap.
Situations change, and you could suddenly find you have a cash crisis. But there is no need to panic. You need to analyse the situation objectively.
There are a lot of options available to you when you find your expenses are beyond limits. If you are married, involve your family and discuss your finances. When everybody chips in, it is easier to get out of debt.
There are small and large changes you need to make to handle a cash crisis. With the right strategy, you can overcome this situation.