Are You Stuck in a Financial Mess? Here’s How to Fix it

September 4, 2021 Mutual Fund

All of us go through difficulties in life, face challenging times and financial crisis. But if you can identify the signs of messy management of finances early on, you will be better equipped to fix the situation.

Are you trapped in financial debt? Does your financial situation look messy and/or mismanaged?

No matter what your circumstances, there are ways to get through a tough financial crisis, ease the stress about money management, and regain control of your finances. You may be able to find the way out for yourself, or you may need someone else’s perspective to help you find a solution.

When it comes to your financial life, you need to be more cautious, otherwise, you might slowly be heading down a messy path without realizing.

The havoc of COVID-19 pandemic has led to an economic crisis in several countries and financial management of many individuals have been impacted dramatically. A financial mess for an individual can take several forms, comprising credit panic, and banking or a stock market crash, loss of wealth, etc.

Recently, I received a call from Shalini, she said, “My investment portfolio is underperforming consistently since the pandemic crisis, my borrowings have created a debt burden and I am unable to control my finances properly. These things are stressing me out, so I thought I should connect with you to get a better perspective on how to handle this mess.”

I responded, “Sure Shalini, we will figure out how we can effectively manage your finances and follow a prudent financial planning strategy for your financial wellbeing.”

Overcoming your financial problems and difficulties is not an easy task, but by persevering with your financial plan effectively, you can overcome the financial challenges and put an end to the financial stress.

Therefore, if you are facing financial difficulties, it’s time to take action to fix your financial mismanagement without any further delay.

Here I have listed few steps you can follow to overcome your financial mess:

1. Identify the underlying causes

The first step to fixing any financial problem is to identify the underlying issues that are causing the difficult financial situation. Look out for these signs: 1) You live from pay-check to pay-check; 2) You have heavy ongoing debts like personal loans, or huge credit card bills, outstanding utility bills, etc.; 3) Your investments are underperforming, savings irregular, and no emergency fund to rely on.

This will help you assess the cause/s and understand the impact of your debt burden.

You see, the exercise of identifying specific causes to your financial problems is important because it is more likely to result in an accurate and lasting solution. To overcome the financial difficulties, it is essential to understand the root cause first and then find resolutions that work even in the long run. Take the time to identify the real source of your financial troubles.

2. Create a Budget

If you are unaware about your cash flows, how will you manage your finances? Therefore, you need to undertake a budgeting exercise that analyses your spending patterns. This will help you control your spending accordingly.

Creating a budget is like turning the lights on to find your way around a dark room. It will guide your spending decisions as you meticulously go through bank/card statements and track expenses. You will know how to spend your money and curb unnecessary expenses in a way that solves your financial problem.

Review your budget occasionally and make necessary adjustments. Build up a corpus for an emergency fund that holds your 12-24 months of all bills, expenses, including loan EMIs, to survive during a crisis. Maintain a corpus to handle unanticipated expenses without going into debt and putting yourself in a difficult situation.

3. Reduce your debts

A major factor at play in overcoming financial difficulties is reducing your debt burden systematically and diligently. This probably takes a big chunk out of your income and creates the misbalance in your outgoings, savings, and investments. Also, the credit card debts with high interest charges take up a significant portion of your monthly budget.

Advisably, you must have the discipline to pay your debt on time and you will reduce your monthly financial obligations. This puts you in a position to start building, saving, and investing towards wealth creation. Ensure to maintain a low debt-to-income ratio (40 %/<) to avoid any debt burden that leads to financial mismanagement.

4. Leverage extra income

Looking at the current environment riddled with uncertainties, it is vital for an individual to have a second or extra source of income. You can earn extra money through various modes such as, monetising your passions, commercialising your hobbies, consulting/freelancing, and/or getting a second job.

The earnings from these activities may seem insignificant compared to a primary fixed income source, but even small amounts can add up to something meaningful over time. With this additional income, you can prepay your debts, credit card dues, EMIs, etc. to reduce the interest or tenure and increase your investments instead.

Additional sources of income can alleviate the financial stress and support expenses.

5. Start saving and Plan your investments

Once you have identified and resolved the debt burden, you can start saving a certain portion of your income, irrelevant of how big or small the amount is. In fact, you should start saving from your first paycheque to prepare for such financial difficulties in the future.

You could try to apportion a small amount from your income towards savings and investments, while reducing your debt burden. You can start with investments as low as Rs 500/- via the Systematic Investment Plan (SIP) mode of mutual funds. Your SIP investments will build a corpus for you over the long term with the power of compounding. You could gradually increase the SIP amount/s as and when there’s an increase in your income.

It is important to systematically create a robust investment portfolio based on your investment horizon and risk appetite to fulfil your envisioned financial goals.

6. Maintain your investment portfolio

If you already hold an investment portfolio and its underperformance is creating financial difficulties for you, consider to review the portfolio thoroughly. You may rebalance the investments and change strategies to get the portfolio’s performance back on track.

Your investment may underperform when the market conditions are unfavourable and may outperform in favourable market cycles. However, if your portfolio is still underperforming when the market is favourable, then you may need to analyse your investments. You could consider evaluating your investments on qualitative and quantitative parameters.

Consistent underperformance is a sign of loss of wealth and you need to immediately take action to curb that and improve the risk-reward ratio. Rebalancing of your portfolio involves shifting your investment/s across asset classes with a plan and strategy to survive volatile market conditions. Aim to build an “All-Weather portfolio” that can withstand any storm.

You see, there are several ways to fix your financial mismanagement, however to successfully overcome financial difficulties, you must be financially literate. For example, the steps mentioned above can assist you in managing your finances better and will be useful only if you are cognizant about ‘all-things-financially’.

Financial knowledge plays an important role in an individual’s wealth creation journey, not everyone has an expert to guide them through. If you empower yourself with the weapon of financial knowledge, you will be able to spot the signs of financial mismanagement, survive any financial crisis and have a secured financial future.

Unexpected financial challenges are bound to arise (in the future), to be prepared and cautious with your finances is the only way you can stave off a financial crisis. With the right preparation, you can maintain your financial plan and prevent a potential financial tragedy. The solution might take time and effort, but once you take these steps to fix your financial mismanagement, you may soon lead a healthy financial life.

This article first appeared on PersonalFN here