Never listen to an analyst! - Be the master of your destiny

Today India's inflation numbers have been announced and as predicted analysts were wrong. The expectations were around 10.2% and it landed up at 8.98%. No wonder they say an economist is an expert who will know tomorrow why that which he predicted yesterday didn’t happen today.

The announcement from Ratan Tata on the overall economic scenario and the reports about increasing job lossses in places like UK were not exactly the news you would cherish. There are lot of uncertainities and many are confused as to how to manage their personal finances.

Without sounding advisory i will share few pointers as to how you can plan yourself since i have seen many of my friends are extremely brilliant but still lack financial planning knowledge. We are Ignorant only in different subjects".

1. Stay with cash. This seems to be a very stupid pointer since many including me would respond that if i have cash then i would stay cash. :). The point meant is avoid huge financial commitments like asset additions at this juncture. The question then arises is how much is sufficient?

• Just break up your financials into following Total Income (A), House hold expenses (B), Investements & savings (C), Debts that are serviced (D), Total fixed assets you own (E), Total assets under loan / debt (F).
• Ideally you should have 6 times that of the commitments as cash or easily convertible to cash. Commitments here means (B+D). You cant survive without this.
• If there is an emergency you need to sustain for 6 months which seems to be the time for you to recoupe and find a new job.
• During uncertain times you can increase it to 9 months may be.
• If you are keen on continuing the investments too in this period then take (B+C+D).

2. Look at your debt service ratio (D/A):
Ensure that D/A does not exceed 25% to 30%. If it exceeds then you are diverting too much resources in accumulating long term assets.

3. Look at your savings ratio (C/A);
Ensure that this more than 35%. Please note that this is less than 1% in countries like US. In India the average is close to 35% i think. The lesser it is, worse shall be your retirement life and long term requirements. (If you are interested more on this check another blog of mine " Fiscally prudent american is a sucker")

4. Gear Ratio (F/E):
Ensure that this is less than 30%. This essential gives you the leverage you have on your networth. Many US companies & house holds are in deep trouble because it is highly leveraged. What does this mean, simply put if your networth is $1 and you take loans for $1 then you are 100% (1:1) leveraged. Lehman which went bust was leveraged on 30:1, which was heavily leveraged.

Please understand that bad debts are created at good times!. Fiscal prudence and living within the means are not old school of thoughts that are extinct but are very much applicable to all us and personal finance is the place to practice this.

Yours fiscally,

Happy reading!
PS; I am not an expert and would not provide any advice for charges / free. Please note that i believe in the saying "you are the master of your destiny".