Emergencies in personal financial planning | Most investors know that the financial planning process is a way to reach their financial goals if they follow it carefully. That is what this process is all about. Most of the time, we hear about people planning for retirement, their children’s college education, their marriage, buying a house, etc. as their financial goals.
But some financial situations that have never happened before catching us by surprise and often shake up our finances. These are what you might call “unusual” money goals. Here are a few situations like this that I’ve seen in my job as an investment adviser.
How to Deal with a Negative Cash Flow
Cash flow is a term used in financial planning to describe a list of monthly income and costs. A “negative” cash flow is when the monthly costs are higher than the monthly income.
In real life, Mrs. Mehta (name changed), a middle-aged single worker with no dependents who ran a successful advertising agency, always ran short of money at the end of the month. Why did they do it?
She had a lot of “investment cum insurance policies” that she couldn’t get out of. More than half of what she made each year went to paying the premiums. So, she only had a small amount of money to spend and still live well.
She was clearly a “victim” of being sold life insurance policies she didn’t need because she didn’t have anyone who depended on her. We had to figure out how to get her out of this mess.
She just needed to be shown the right way and told to stop paying the premiums and reduce her monthly cash outflows. This was easier to say than to do since she had been “brainwashed” for many years to hold and pay for such insurance policies.
After being hesitant at first, she decided to stop paying the premiums and give up the insurance policies. This got her out of a tight spot with her money.
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Stuck In A ‘Debt Trap’
Mr. Nair (name changed) was renting a house and wanted to make his first investment. He chose to buy a flat far from where he worked. He used his life savings to make the first down payment, and then he took out a loan to pay off the rest.
The loan’s monthly payment called the equated monthly installment (EMI) was equal to 60% of his total monthly income. This left him with little money at the end of each month.
Because of the EMIs, he had to live on very little and couldn’t make any investments.
In the end, the only way for him to get out of this “debt trap” was to sell the house. Since it was his first investment and he had put his entire life savings into it, he felt very emotional about selling it. At that point, he had no choice but to face the harsh truth. He had to sell the property to get out of the debt trap and get his cash flow back to normal.
Even though each case and person is different, it is always best to start out by investing in financial assets instead of “illiquid assets.”
The temptation to retire early in your 40s
It has become popular, especially among young people, to retire early, in their 40s.
Many people want to retire early so they can pursue their talents, hobbies, and interests and get out of the daily grind and rat race. Even though many people want to retire early so they can enjoy the good things in life sooner, they often forget the following:
- With longer life expectancy and rising prices,
- To retire in your 40s, you need enough money to live on for the 35–40 years after you retire. How are you going to put together the corpus that you want?
- Be ready to go back to work for any reason, like getting bored or a change in the family situation.
Because of this, unusual situations must be taken into account when planning finances. It’s easy to make goals that match your hopes and dreams.
To reach them, you need to think, act, and be guided in the right way. Planning your finances isn’t just about numbers and calculations; it’s also about what you’ve learned from life and being realistic.
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