Life gives us ample examples of how to manage our finances at every walk of life. Here are some of them that we come across commonly:
- Emergency fund: Building an emergency fund is the first step towards maintaining a healthy personal finance life. We have several examples in our day to day activities wherein we anticipate emergencies and take the required precautionary actions. We always make sure that a glass of water is handy when we sit for a meal. This is in anticipation that the food may be spicy. Most of us always keep a torch or some other power backup in anticipation of a power cut. We check our fuel tank before going for a long drive. These are common steps we take in anticipation of some mishap or the other. However, we often stay unprepared for the more serious situations in life. One should maintain a dedicated fund for unforeseen situations.
- Diversification: Cricket is the most popular game in India. A cricket team is not made of 11 bowlers or 11 batsmen. It is a combination of bowlers, batsmen, an all-rounder and a wicket-keeper. The team management generally tries to pick the winning combination based on the playing conditions and the opposition. Similarly, never concentrate on a single asset class while investing. Savings should be diversified among various asset classes. The ideal combination of various assets classes should be decided based on the individual's risk appetite.
- Advice: We rely on expert advice in every aspect of our lives except managing finances. In simpler terms, we will not consult an engineer for a heart surgery or a doctor for constructing a building. But when it comes to personal finance, we mostly rely on the advice provided by family, friends, neighborhood agents or colleagues. A financial advisor always remains our last option. Always depend on reliable advice and consult a financial advisor before making financial decisions.
- Financial decisions: We have many examples of how team work gives us good results. Consider games like cricket, soccer, hockey or any other team sport. Every member of the team contributes to the success of the team. Similarly, it is important that every product in the diversified portfolio contributes to the final return of the portfolio. Buying a wrong product will not only diminish the returns but will also eat away all our savings. So always do research and ask the right questions before picking members (products) of your portfolio team.
Nitin Vyakaranam is the founder and chief executive officer, ArthaYantra, an integrated online personal finance company.
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