Demonetisation: 5 things
to learn about managing personal finances.
Though the exercise is unlikely to be repeated any time soon,
demonetisation offers some takeaways that should form the cornerstone of your
financial strategy.
1. Don’t wait for a
crunch to budget or spend wisely
The first takeaway from
demonetisation is also the mainstay of every financial plan: save and spend
according to a budget. During the current crisis, people have been forced to
first take care of their critical expenses, investments and bills, before considering discretionary expenses, while
entertainment and frivolous purchases have been completely done away with. The
restricted inflow of cash means that saving has become a priority, as does
sticking to a tight budget. While one need not curtail one’s finances to such
an extreme in the normal course, it is this forced discipline of budgeting and
prioritising one’s spending that will help you reach your financial goals with
ease. So have a healthy dose of discretionary expenses, but not befo re you
have saved and invested.
2. Don’t hold too much cash; invest it
If you’ve been stashing money at home to fend off an emergency, rethink the strategy. Cash does offer flexibility and you should have 3-6 months’ worth of expenses at hand. But even this amount should be invested in short-term debt funds, liquid funds or sweep-in savings accounts linked to fixed deposits. If, however, you have a copious amount lying idle, know that you are eroding its purc hasing power. The money is not growing and inflation will allow you to buy fewer things with the same amount some years down the line. Besides, you are forgoing the high returns you could have earned by investing it in, say, equity, for long-term goals. Also try to make most transactions cashless and retain only a small amount of cash at home.
3. Don’t change asset allocation in a panic
Panic is virtually a default reaction in times of financial crises or une xpected developments like demonetisation. Though Indian investors have wisened up since the 2008 economic crisis, many are still rushing to the security of gold and debt after the 8 November announcement. This is yet another opportunity to remember that asset allocation should be changed only in line with your age, short- and long-term needs, risk appetite and proximity to life’s goals. While one should rebalance from time to time to retain the desired asset allocation, do not take erratic decis ions and risk your investments by reacting to short-term aberrations.
4. Keep pace with tech to handle your finances
It pays to keep pace with technology. Literally, as demonetisation has proved. Though banks and other institutions have been pushing online and mobile transactions for a few years now, demonetisation may prove to be the inflection point. Even as people are rushing to download mobile wallets and register for Net banking and online transactions the clear learning is that it is critical to keep track of the latest tech upgrades. The people who were already paying their bills via Net banking or mobile wallets, and using credit cards, did not suffer as much as those who weren’t. It’s high time then to shift to mobile banking, downloading apps for financial transactions, and learning about online transfer of funds. It will not only increase your ease of transactions, but also cut down on time and help save money.
2. Don’t hold too much cash; invest it
If you’ve been stashing money at home to fend off an emergency, rethink the strategy. Cash does offer flexibility and you should have 3-6 months’ worth of expenses at hand. But even this amount should be invested in short-term debt funds, liquid funds or sweep-in savings accounts linked to fixed deposits. If, however, you have a copious amount lying idle, know that you are eroding its purc hasing power. The money is not growing and inflation will allow you to buy fewer things with the same amount some years down the line. Besides, you are forgoing the high returns you could have earned by investing it in, say, equity, for long-term goals. Also try to make most transactions cashless and retain only a small amount of cash at home.
3. Don’t change asset allocation in a panic
Panic is virtually a default reaction in times of financial crises or une xpected developments like demonetisation. Though Indian investors have wisened up since the 2008 economic crisis, many are still rushing to the security of gold and debt after the 8 November announcement. This is yet another opportunity to remember that asset allocation should be changed only in line with your age, short- and long-term needs, risk appetite and proximity to life’s goals. While one should rebalance from time to time to retain the desired asset allocation, do not take erratic decis ions and risk your investments by reacting to short-term aberrations.
4. Keep pace with tech to handle your finances
It pays to keep pace with technology. Literally, as demonetisation has proved. Though banks and other institutions have been pushing online and mobile transactions for a few years now, demonetisation may prove to be the inflection point. Even as people are rushing to download mobile wallets and register for Net banking and online transactions the clear learning is that it is critical to keep track of the latest tech upgrades. The people who were already paying their bills via Net banking or mobile wallets, and using credit cards, did not suffer as much as those who weren’t. It’s high time then to shift to mobile banking, downloading apps for financial transactions, and learning about online transfer of funds. It will not only increase your ease of transactions, but also cut down on time and help save money.
5. Buy your kid a piggy bank,
give pocket money
The final takeaway from demonetisation is to provide your child a piggy bank and a regular supply of pocket money. The children who already have these proved to be a boon for their parents during the current crisis, with lower currency and loose change helping tide over the difficult time. The learning, however, is not to rely on this stash as a contingency fund since these minuscule savings are unlikely to help you during a bigger financial crisis. On the other hand, the habits of regular saving, discrete spending, making their own purchases and focused saving for small goals will inculcate financial discipline in kids. They are not only likely to manage their finances better as adults but also handle crises with greater equanimity.
The final takeaway from demonetisation is to provide your child a piggy bank and a regular supply of pocket money. The children who already have these proved to be a boon for their parents during the current crisis, with lower currency and loose change helping tide over the difficult time. The learning, however, is not to rely on this stash as a contingency fund since these minuscule savings are unlikely to help you during a bigger financial crisis. On the other hand, the habits of regular saving, discrete spending, making their own purchases and focused saving for small goals will inculcate financial discipline in kids. They are not only likely to manage their finances better as adults but also handle crises with greater equanimity.
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