A clear understanding of your cash flow requirements helps you achieve effective asset allocation for your financial goals.
1. Create an emergency fund
To meet your expenses in case of contingency, you need to always keep some amount of savings in your bank account. Before starting your investment, you should ideally maintain saving which equals to at least 3 to 6 times your monthly expenses. Doing so will help you maintain long-term investment towards a particular goal.
2. Define your goals
You should link your investment to a particular financial goal. Doing so will help you know the exact corpus you require to achieve that goal. For example, you need to buy a luxury car by 2022 of worth Rs 20 lakh then in such case, you have defined your financial goal well.
3. Have proper cash-flow management
A clear understanding of your own cash flow requirements helps you achieve an effective asset allocation for your financial goals. For example, Manish Kothari – Head of Mutual Funds, Paisabazaar.com explained if you are expecting a major outflow of cash in the short term, then you should start preparing for that goal by investing your cash surpluses in short-term debt funds. “In case, you have been already investing for that goal through equity funds, then a steady redemption from those funds through the Systematic Transfer Plan (STP) route for short-term debt funds would help consolidate your gains and reduce the downside risk,” he said.
4. Understand the financial products
Adequate financial literacy is crucial because of the availability of multiple investment products in the market with varying returns and risk profiles. “You need to choose a product based on your risk profile, investment horizon and financial goals. You also need to closely understand the tax liability and benefits for the product you are investing in. Also, knowledge of financial products helps better money management and create a strong investment portfolio,” said Kothari.
5. Acknowledge your net worth
Simply put, your net worth is the difference between your assets and your liabilities. Your assets include everything from property, business equity, jewellery, investments, and even your personal assets from car to furniture to a stamp collection. Adhil Shetty, CEO – BankBazzar.com told to Moneycontrol that liabilities include all your debts including home loans, car loans, business loans, personal loans, credit card dues, tax liabilities, and more. So, if you have assets worth Rs 2 crore and liabilities worth Rs 1.5 crore, your net worth is Rs 50 lakh. Your net worth is the most accurate estimate of your wealth. Moreover, since it is a specific number, it can be tracked with precision. This means you can measure your financial progress from one month or year to the next. “It is more reliable than measuring the income because a rise in income does not factor increase in expenses or taxes. So, if your net worth is flat or declining despite a growing income, your financial situation may not be improving at all,” he said.
6. Pay all your debts
Adhil said that the question you need to ask yourself is rather simple: Which number is greater—the return on your investment or the interest you are paying on your debt. If you are paying more interest than you could earn, you are far better off by paying the debt. “However, life is rarely simple, and hard math is not always the solution. It is also essential to evaluate your financial intentions. Maybe being debt-free offers you a sense of relief that can’t be measured. Or maybe it is the idea of having an emergency fund that will cover six months of expenses is what works for you. Ultimately, healthy finances are important for a sense of financial well-being. For that reason, financial decisions cannot always be logical alone. However, emotions should not be the only factor,” he said.