Skip to main content

Managing Cash Flows in financial planning

Cash flow management is the core of financial planning. It needs to addressed comprehensively, if the financial plan has to work.

Liquidity: The first principle in cash flow management is maintaining liquidity to the extent of approximately three months expenses. In certain cases, where the income flows are uneven, we may even suggest up to six months' salary or expenses as a liquidity margin. It is a good idea to keep this in the form of actual cash in the bank account, sweep-in deposits (which is near-cash) or in debt mutual funds. This is maintained to ensure there is no problem even in case of disone is changing jobs, has medical conditions due to which one is on loss of pay and so on. Then, the liquidity margin will come in handy. This will be especially useful for people who have monthly instalments to clear, like a house loan, which need to be paid over and above the regular expenses.

Additional provision: It is always better to have liquidity over and above that provided by regular income sources. Additional sources are those which could be liquidated when the need be, like in bank fixed deposits. Investments in stocks and mutual funds (equity or debt) could also come handy, as they can be liquidated as and when required. Investments in Public Provident Fund, Employees Provident Fund, National Savings Certificate are illiquid as they come with a mandated lock-in period.

Contingencies: You would like to provide for unforeseen times. Like, for your aged mother's health requirements. Contingency is for unknown situations or emergencies, for holidays or guests, insurance premiums, and so on, in a particular month. When such expenses come up together, they disrupt surplus available. It is a good idea to be prepared and invested for appropriate tenures.

Example: If holiday expenses are coming up in seven months, invest in a 180-day FMP and use the proceeds on maturity. If the amount is not available upfront for investment, you can accumulate it through a systematic investment plan (SIP) in a mutual fund scheme. Provisioning can also be done from maturing investments. For instance, investments maturing between now and the time required can be moved to a debt fund and be redeemed when required.

Handling investment inflows: Maturing investments need to be reinvested or put to use, as per your budget or upcoming expenses. It is important to have information regarding all the investments due to mature in the next one year. Plan for investing these amounts in the interim, after considering upcoming or sudden expenses. Ideally, chalk out which amounts are going to be invested, in what kind of products and how much need to be consumed. Sometimes, the amount expected to be received may be big, like a annual bonus. Since the actual amount may not be known, having a rough investment plan would be needed. There could be investments or money from insurance that we would have redeemed in a particular month. Such inflows also need to be considered for deployment.

Managing improved inflows: There are points when the monthly cash flows would improve. For instance, you may get an increment in six months of approximately eight per cent, then the increased cash needs to be deployed. Decide the investment avenue in advance. For instance, an SIP or recurring deposit is recommended for parking this fund. Sometime, it may be used to augment the liquidity to the required level, if it was dipped into due to sudden rise in expenditure. Once this is done, revert to investments in SIP or recurring deposit.

Cash outflows contingent on inflows: When planning, we sometimes suggest individuals incur an expense which is contingent on an inflow. For instance, a foreign holiday may be suggested only if they receive a bonus of a certain amount. Or, consider renovating your house only on receiving a raise or a bonus. Apart from easing the cash flows, it also brings discipline and commits cash inflows for cherished goals, especially not very important ones.

While planning your cash flow, it is necessary to choose the appropriate investment options based on the end-use of that money. When planning this, apart from the tenure, the choice of investment instrument would also be based on the returns, risk, liquidity requirements and tax liability. Appropriate choices, here, would help in improving the returns. And at the same time, provide for smooth management of your finances. Financial planning itself and cash flow management in particular, are easy to understand and mostly intuitive. Thinking through the whole thing and executing these over time is the key to success.

 

Just remember: God is in the details.

 

Popular posts from this blog

Post Office Deposits Interest Rates

Best SIP Funds to Invest Online   SIPs are Best Investments when Stock Market is high volatile. Invest in Best Mutual Fund SIPs and get good returns over a period of time. Know Top SIP Funds to Invest Save Tax Get Rich For further information on Top SIP Mutual Funds contact  Save Tax Get Rich on 94 8300 8300 OR You can write to us at Invest [at] SaveTaxGetRich [dot] Com

HDFC Capital Protection Oriented Fund – Series II 36M May 2014 NFO

Download Tax Saving Mutual Fund Application Forms Invest In Tax Saving Mutual Funds Online Buy Gold Mutual Funds Leave a missed Call on 94 8300 8300     HDFC Capital Protection Oriented Fund – Series II 36M May 2014 NFO will be open for subscription from 16th May 2014 to 30th May 2014. The key features of the scheme are as mentioned below:   Type of Scheme A Close Ended Capital Protection Oriented Income Scheme Benchmark Crisil MIP Blended Index Fund Manager Mr. Anil Bamboli , Mr. Vinay R Kulkarni & Mr. Rakesh Vyas New Fund Offer (NFO) Period 16 th May 2014 to 30 th May 2014. Minimum Application Amount Rs. 5000 and in multiples of Rs.10 thereafter Plans/ Options Offered Growth and Dividend Payout Facility Liquidity To be listed For further information contact Prajna Capital on 94 8300 8300 by leaving a missed call

How to PPF Account extension after maturity

A PPF account can be retained after maturity without making any further deposits. The balance will continue to earn interest till it is closed. Public provident fund or PPF remains one of the most popular savings options for the long term despite a gradual decline in interest rates over the years. PPF accounts have a maturity period of 15 years and they can be extended. If there is no fund requirement, financial planners say, PPF account holders should extend the account beyond 15 years. In terms of income tax implications, PPF accounts enjoy the benefit of EEE (exempt-exempt-exempt) status . Under Section 80C, contribution up to Rs 1.5 lakh in a financial year qualifies for income tax deduction. The interest earned and maturity proceeds are also tax free. What are your options when a PPF account matures? 1) A PPF account can be closed after the expiry of 15 financial years from the end of the year in which the account was opened. 2) The subscriber can retain his

SUNDARAM SELECT MIDCAP

Best SIP Funds Online   SUNDARAM SELECT MIDCAP is a mid-cap focused fund has shown remarkable consistency in outperforming both its benchmark index and the category over many years. It takes a sharper tilt towards mid-caps compared to its peers. While the fund manager used to take large positions in his conviction picks, he has moderated exposure to his top bets over the past year. He has also chosen to stay away from capital guzzling businesses instead favouring those with efficient capital allocation practices. SUNDARAM SELECT MIDCAP fund boasts of a superior risk-reward profile compared to many of its peers, and while it has underper formed slightly over the past one year, its proven track record in the hands of a capable fund manager provides comfort. It remains a worthy pick in the midcap basket. SIPs are when Stock Market is high volatile. Invest in Best Mutual Fund SIPs and get good returns over a period of time. Know Top SIP Funds to Invest Save Tax Get Rich For further inform

HDFC Prudence Fund - Invest Online

Download Tax Saving Mutual Fund Application Forms Invest In Tax Saving Mutual Funds Online Buy Gold Mutual Funds Leave a missed Call on 94 8300 8300   HDFC Prudence Fund Balanced funds are excellent investment options for investors with moderate risk tolerance, since they give very good risk adjusted returns. It is very surprising why balanced funds are not nearly as popular as diversified equity funds, despite being around in India for nearly two decades. Balanced funds are essentially hybrid funds with both debt and equity in its portfolio mix, to balance the portfolio risk. These portfolios typically hold up to 70% of its portfolio assets in equities and the balance in fixed income. On a risk adjusted basis, balanced funds have delivered excellent returns compared to other equity fund categories, e.g. large cap or diversified equity mutual funds. The chart below shows a comparison of category returns between large
Related Posts Plugin for WordPress, Blogger...
Invest in Tax Saving Mutual Funds Download Any Applications
Transact Mutual Funds Online Invest Online
Buy Gold Mutual Funds Invest Now