7 ways to deal with financial crunches

Managing finances efficiently is paramount in financial planning, for individuals and businesses alike. Imagine the case of an individual whose salary increases at a nominal rate every year, whereas expenses increase at a faster pace due to high inflation. Now, it is very easy for such an individual to suffer with a financial crunch in the absence of proper planning.

Similarly, let's say you run a business which is dependent on consumer demand. A lack of consumer demand due to the same reasons can cause cash crunches for your business. It is quite important to plan in advance in order to keep such problems away.

Here are a few tips to manage cash crunches:

1. Curtail unnecessary expenses

Money saved is money earned. When you cut down your not-so-critical expenses, you end up saving more. Making it a habit to purchase only those things which are essential is a good idea. When you have sufficient money, spending on unnecessary things doesn't seem to cause a problem. However, in time of a financial crunch, this pressurises your finances further.

Hence, it is always better to curtail unnecessary expenses even during good times.

2. Apportion money for regular expenses:

This follows the traditional principle of envelope budgeting. Based on your expenses pattern of the past, set aside money for all the expenses you can count and estimate beforehand.

For instance, assume you incur monthly expenses of Rs.30,000 on EMI, Rs. 2,000 on electricity bills, Rs. 900 on gas bills, Rs. 1,000 for servants, Rs. 20,000 as rent and Rs. 2,000 on your mobile and internet bills. These expenses are fixed and are not expected to change a lot by every passing month. Also, you know that these expenses have to compulsorily be incurred every month, irrespective of your financial position.

Usually, such countable expenses form a large chunk of your overall monthly expense. So when you have extra inflow in any month, you can set aside money for such expenses to help you in the times of need.

3. Defer your expenses

Analyse your expense pattern and see if any payable amount can be deferred to a later date when your cash flow position improves. You will realise that there are many expenses which are not critical and can be taken care of later.

For example, you may want to purchase a second air conditioner for your house. By trying to postpone the purchase to winters - when the prices drop - you may save yourself some money. Alternately, you can also plan to save in small amounts on your big ticket expenses.

4. Maintain a contingency fund

You must plan to maintain a contingency fund, or an emergency fund, worth at least six months of your expenses. This will help you manage your expenses in case a financial crunch occurs. The expenses to be considered include the regular mandatory expenses for your household, fees of children's education, medical liabilities and EMI payments. Remember to invest this corpus in a liquid fund which can give you returns and at the same time be withdrawn any time.

5. Monetize gold

If you are going through financial issues, you can look at monetizing the gold you hold. You can deposit gold with commercial banks in exchange for cash certificates which will give you fixed interest. This is based on gold holdings. Such a scheme will help you add an additional income stream and ease your finances to some extent.

6. Generate funds from friends and family

If you think you have some commitments which cannot be avoided, it is better to look for finance within your social circle rather than approach a bank for loan. It is often seen that people hesitate to ask for money from their friends or family.

The fact remains that you will be paying more interest on a personal loan than what you may have to pay if you borrow from the people you know. Looking at formal sources of finance as the last resort is a good idea.

7. Don't disturb your long-term investments:

You must plan for your goals based on the time frame involved.

For example, you should not fund a short-term goal with savings meant for the long-term. However, in case of a financial crunch, you may be tempted to let go of this discipline and want to draw from your long-term investments. As such investments are meant for the long term, the returns from these can be affected if you withdraw midway. Therefore, you should use such long-term investments for your short-term commitments only when you have used all other sources of finances and this is the last resort.

Planning in advance for adverse situations in life is the key to managing financial crunches. Maintain an emergency fund, cut back unnecessary expenses and save smartly to overcome financial difficulties.

BankBazaar.com is an online loan marketplace.

Disclaimer: All information in this article has been provided by BankBazaar.com and NDTV Profit is not responsible for the accuracy and completeness of the same.