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Managing Your Finances in a Cash Crunch

Managing Your Finances in a Cash Crunch
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You're reading Entrepreneur India, an international franchise of Entrepreneur Media.

However good your financial situation is, it always pays to have a plan for a rainy day when you might not have an easy flow of cash. Many people go through an unexpectedly rocky patch when they are strapped for cash - maybe because of a sudden loss of a job or a sudden financial commitment.Instead of being caught by surprise or unable to handle such a situation, here are some things you can do right now to proactively plan for a potential cash crunch, and some things you can do if you are already undergoing a cash crisis.

Keep Some Money Liquid: It might be tempting to invest your funds in well-performing mutual funds or long-term bonds that offer great returns. However, remember that if you need money urgently, you will have to pay penalties and other charges for removing your money before the scheduled date. The last thing you need during a funds crunch is to pay heavy penalties for accessing your own money. Instead, make sure that you have money in your savings account or in FDs that can be accessed quickly and with minimal or no payment in times of need.

Save For an Emergency Fund: You will always find a hundred reasons not to keep aside money on a periodic basis – there are school fees to be paid, EMIs to be repaid, insurance premiums due. Among this endless list of legitimate expenses, you have to discipline yourself to set aside a fixed amount every week, month or quarter. Ideally, you should have at least 6 months income saved in your emergency fund to cover your basic family expenses. Having a nest egg, however small, can buy you sometime during a cash problem while you arrange the rest of your finances. It can also buy you invaluable the mental comfort that you will not be caught unawares by a financial emergency like a loss of employment or a medical crisis. While taking a personal loan is always an option, they are among the most expensive retail loans on the market, with high-interest rates.

Manage Your Credit Card: If you have a large - or even small - outstanding, chances are you are paying a hefty amount in interest charges. Try and pay off your credit card debts first so that you are rid of the heavy interest costs that are calculated on a cumulative basis. Also, check for any suitable zero balance transfer offers – these allow you to transfer your credit card debt to a new lender without paying interest on your balance for a certain fixed period of time. This will give you a valuable buffer period to try and organize repayments on your existing credit card debt.

Monitor and Streamline Your Expenses: If you are going through a cash crisis, no expense is too small to be reduced. Track your expenses closely and see where you can make cuts – it could be something as small as taking lunch from home instead of buying it outside. Or discontinuing a landline connection that you rarely use. Or, on a larger scale, shopping around for cheaper insurance offers or home loan transfers. Every single successful saving counts.

While experiencing a cash crunch is never easy, planning for it in advance and knowing how you can deal with it, can help alleviate the situation. It is never too early to plan and take steps to deal effectively with such an eventuality.

 
Edition: April 2017

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