For many Indians, financial worries are a part of life. Being a developing economy with a very large population living without adequate financial resources, financial anxiety is like a part of life. The largely middle-class families of India have high aspirations and dreams but often feel frustrated and hope of breaking off from the vicious cycle of living hand to mouth.

Financial Stress?

It is at the next level of the situation described above. It is an abnormal situation arising out of something unexpected or a situation which was foreseen but now has aggravated. Events like loss of a job, a medical emergency, loss from business, losing your investments, theft of property, etc, may give rise to your financial troubles. Further, situations like funding for child's education, marriage plans, etc for families without an adequate and stable source of income can also come as financial stress. These are only some of the instances/situations and there can be many more reasons for getting into financial stress/troubles.

The Way Out:

Obviously, the one thing one desires with financial troubles is to get out of it as early as possible. However, being in stress, it is not easy. Perhaps a helping hand, a guide, a logical way out would be of great help to those who do not know where to start. Your financial awareness and discipline will be tested here. We present our own version of the step-by-step guide to find your way out of your financial troubles. We hope that readers can not only use it during stress but also during better times to avoid getting into any more trouble.

1. Get in the right frame of mind: The first thing one has to do is to get into the right mental frame for tackling the problem. This is not as easy as a lot of negative thoughts may be coming to your mind. However, remember that there may be people who have faced much more and have come out of it and nothing will stop you from coming out of this temporary situation. Only you have to believe that it is possible and would require your focus. You have to be positive, committed and focussed on resolving your troubles.

2. Identify stress points and root causes: You have to be honest about everything first. A lot of financial trouble happens when we ignore and reject early warning signs and do not take remedial actions before time. The more honest and realistic you are, the better are the chances of success. With this honesty, one would expect you to first list all your stress points and the root causes behind them. What were the decisions or habits or events that led to such problems? What were the mistakes you did in past? What are the key and immediate concerns/challenges before you? These are the questions you need to answer.

3. List out financial priorities and solutions: The next step is to think and list out the solutions you need that will resolve your troubles. This may take some time or no time at all. Your possible solutions would come from your own situation. The solutions will also give an idea of the decisions you need to take to get back control of your financial life. The list will also need to have priorities attached to every important decision or action plan. This blueprint of priority will be in line with the financial priorities you have.

   Generally, getting out of debt should be the first priority and one should even consider extreme solutions to resolve the same. For eg., if you have an expensive car loan, can you not sell your car and repay the loan? If you have a loss-making business, can you not sell some equity/ bring in a new partner? Can you not sell/lease your the idle jewellery lying at home to get more finances? Be open-minded and explore all possible solutions at your hand.

4. Stay out of any more trouble: This is very obvious, isn't it? If things are not going your way, please do not take more risks. If possible, avoid creating more situations or bringing more complexity to your already stressed finances. Go very conservative on your risk appetite during such periods. If few decisions are unavoidable, try to delay/push the decisions further into the future.

5. Execute and review your plans: Having a plan is one thing but executing it diligently is another challenge altogether. One has to execute the plans ruthlessly, without compromise and within defined time, dates. Treat this as a business challenge or a game that you need to win at any cost. Make no delays, compromises to do what is required to be done. Once you overcome your temporary situation, you will have ample time to think about your priorities and make up for the hard decisions you took.

   On preparing your action plan and solutions, remember that If you are serious about resolving your finances, you will not shy away from making hard decisions. Do not think what your family, friends or neighbours will think of your decisions. If your social stature is dictated only by your money power, it is the least you should care about.

6. Consult your financial advisor: The last piece of advice is to engage your financial advisor and ask him/her to help you out. If you do not have a financial advisor, we advise that you look out for a good one. The importance of a financial advisor cannot be over-estimated. He will bring in his valuable insights, experience, knowledge and a ready action plan to resolve your issues. Those with long-standing relationships with good financial advisors rarely fall into financial troubles.

Action Plan for Personal Finance

An action plan is a road map for the achievement of some important goal. Most of us have some personal goals but we are often found falling short of the action plan to pursue them. With this article, we hope you make å smart action plan of your own and follow it.

Make A Successful Action Plan:

Before we take about the key actions you should explore, let us ensure first ensure that the entire ritual does not fail and the actions we decide to undertake are successful. Here are the four steps that will go a long way in ensuring your success...

1. Consider only a maximum of three actions. Even one to two actions is good enough as too many actions are hard to cope up with and you may lose focus and passion with time.

2. Make sure that the chosen actions are worth your time, holds your interest and passion, is on top or requirement and is also practical and meaningful for you to implement.

3. Ensure that the actions are well-defined, measurable, time-bound and in numbers. This will give you a very definite idea of the target and will help success instead of having to live with vague, subjective interpretations. Note, we have given open-ended actions below which have to be well-defined by you.

4. Make yourself accountable by sharing your actions with others and also maybe asking others to keep track of the same. Your spouse, children, parents and even friends and bosses can be made asked to keep you on track and support you.

Its' time now to explore a few suggested personal finance actions we hope you will make and also follow through.

Invest __ % More:

If you are a regular investor and think that you do enough investments, this year do more than enough. Resolve to invest a certain extra percentage each month this year. For example, if you invest Rs 10,000 each month, invest 10% extra, which is just an additional Rs 1000, which you can manage. At the end of the year, you will have invested an extra Rs 12,000. If you are yet to start saving, this action should be also at the top of your list.

Know that while you can come up with 100 reasons to avoid investing more right now and plan to invest more in the future, you just need one reason to start investing more from now. And believe us, there would be many compelling reasons for you to start saving. However, investing in the right product is also crucial. Equities give us the magic of compounding over a long-term, and its something that you should also explore. Remember, even if you invest a higher amount later, you will not be able to beat the returns of compounding you will generate on the smaller amount over a long duration of time.

Be adequately insured for all risks

When was the last time you carefully looked over your insurance coverage in a comprehensive manner? It is important that you keep on checking on your insurance coverage and making adequate changes in same. Evaluation of comprehensive coverage will require you to assess insurance coverage for life, health, personal accident, critical illness and home insurance. The idea is to protect the financial well-being of your family in case of any death, disease, disability or damage to property. If you haven't explored insurance in depth, resolve that you will do so asap and get adequate coverage.

Keep an Emergency fund of __ months income:

Life is unpredictable. You never know what will happen next and you might need money for some reason. Medical emergencies, unforeseen expenses which are unavoidable, sudden cash crunch, an urgent requirement for working capital etc. Thus, it is important that you have some amount set aside for emergencies. If you don't already have an emergency fund, it's time to start building it and if you have one, add a little more money to it. Typically, an emergency fund of three to six months of your income or expenses should be adequate enough for you.

While we are strictly against money lying in your savings bank account earning nominal interest, we advise you to build an emergency fund nonetheless and keep this money in a liquid mutual fund or a savings account.

Cut expenses by __ %

The main culprit behind low savings and an unhealthy financial situation is often our spending habit. There is often a disproportionately high expenditure on discretionary expenses. Expenses on entertainment, shopping, purchase of gadgets, frequent mobile upgrades, etc play havoc on our finances beyond our imagination. One action that you can explore is to track these expenses on a monthly basis by recording it and then planning the same from next month onwards. We do not ask you to say 'no' to everything, just put a limit in place, relative to your income and your saving plans. With this action, we can easily cut about 10-20% of our expenses every month. Remember, a penny saved is a penny earned.

Cut your debt portfolio by __ %

An easy and hassle-free loan is both a boon and a curse. While the availability of easy loan helps one through difficult times, it might sometimes also lead to unnecessary consumption. This is one of the reasons why people should shy away from taking credit cards. What people actually need to do is be smarter with their consumption pattern. Should you take a high-interest personal loan for a vacation? No. But if needed, should you avail an education loan for your kids? absolutely Yes. This year, learn to make a differentiation between good and bad debts. Good debts help you build assets, improve stature (like home, education) and are of low costs. Bad debt is often towards depreciating assets or intangible experiences (like car, travel, gadgets, etc) and often are of high costs (like CC, personal loans). This year resolve to clear your debt portfolio of all the bad debts first and then good debts, if possible. Being debt free by the year end can be a great action.

We sometimes get sizable cash inflow as windfall gains or bonus for salaried employees. The first question arises in our mind whenever we have a big cash inflow is whether to invest that amount for future or pay off existing debt to reduce EMI burden. We always feel like being caught between the devil and the deep blue sea.

Paying off debt and investing for future, both are important financial aspects of life. Paying off debt will help to reduce EMI burden and therefore improve your cash flow condition, and investing for future is beneficial for obvious reasons. Any rational human being will think about getting rid of debt as soon as possible, being debt free leads to healthy financial life.

But not always. Two important things to consider is potential cost of your debt and expected earning from your investment.

Compare Earning Against Cost:
One of the most common approaches to tackling the question of debt repayment versus investment, is to compare the interest rate of your debt to the returns on your investments. In general, high-interest loans that exceed your investment earnings should be paid off first. Likewise, if you have low-interest debt, greater benefit might come from making the minimum payments and putting more money into your investment accounts. Let me put it this way. e.g. If you have an outstanding loan on which you are paying 15% interest and you have an option to invest in a product which has the potential to generate 15% return, which one is better? Paying off debt will ensure you saving of 15% while investment has the possibility of generating 15% or even lower or higher return. There is an element of uncertainty here. This is something that you have to decide as an individual.

Consider the Type of Debt:
All debt is not equal. The type of debt you have, can play a role in the decision as to whether to pay it off as soon as possible or put your money towards investments. High-interest loans that are not tax deductible, such as credit cards, car loans or personal loans, should be paid off as quickly as possible. Other type of loans like mortgage loan taken to buy house or education loan for which you get tax benefits are in fact good to carry on as typically they come with lower interest rates and real cost comes down even further after taking tax advantage into account. Typically, a 15 year home loan costs you around 9.5 to 10%, this rate further comes down after considering tax advantage on that.

Determine Your Goals:
Everyone's financial situation is unique so it only stands to reason that your personal financial intentions will play a part in your decision. For many people, being debt-free offers a sense of relief that can't be quantified. For others, having an emergency fund that will cover eight months of expenses helps them to sleep at night. Emotions can sometimes overrule logic when it comes to financial decisions.

Depends on Human Psychology:
Human psychology also plays an important role in financial decision making. Certain class of people who are typically risk takers prefer to continue with debt and like to utilize funds available for investment to generate better return, even if it comes with risk. e.g. entrepreneurs, businessmen. They will always love to put that money in their business or in an investment product, which has potential to generate return over and above the interest paid on outstanding debt.

Strike a Balance:
You can also choose to make part payment of outstanding loan and bring the EMI down, as most loans are charged on reducing balance basis. So if you make part payment of outstanding loan, your EMI can come down to that extent. The remaining amount you can use to make investment.

e.g. You have 2 lakh outstanding in car loan and you get 2 lakh as some cash inflow. Should you use entire 2 lakh to pay off outstanding loan. Rather you can use 50% of the amount to pay off debt and bring down you car loan EMI and remaining 1 lakh can be invested for future.

The Bottom Line
There is no 'one size fits all' solution to the question of whether it is more important to pay off debt or invest. Every individual has his/her unique financial situation, which needs to be considered before taking any decision. e.g. if you have not created any emergency funds, utilize available money to put aside in short term bank FD or money market mutual funds so that can be used anytime if emergency arises rather than paying off debt.

If you find it really confusing to decide, try tackling both at the same time by making part payment and part investment or put your focus on financial goal to gain peace of mind.

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