Financial planning for families moving from double to single income

As a continuation to Firstpost's series on financial planning, today we bring you financial planning for a family that becomes a single income family from a double income one. Though overall financial planning principles are similar to that of a double income family, not everything will work for a single income. Read on to know more.

Your money: You have been living as a double income family, but are now planning to move to single income. It could be you want the happiness of rocking the cradle in the near future or one partner wants to be a full time student for the time being. Otherwise, your spouse has got a transfer and the new location is not offering a good opportunity. The reasons could be any. The truth is any family going from double income to single income changes in many ways. And yet many go through this transition unprepared. But it's best to be prepared.

Most important steps: "One of the biggest mistakes many Indians make is they assume they have to tap emergency funds while moving from double income to single income. They neglect risk management needs," says Sumeet Vaid, a Mumbai-based CFP. Simply put, if you are planning to move from double income family to single income family, do not touch your emergency funds. In fact, if you don't have an emergency fund, you should be creating one as soon as possible. Keeping aside six months' expense is a good idea.

Mostly when familes move from double income to single income they dip into their savings instead of reducing their expenses. Getty Images.

Life Insurance: If it's a double income family, there is a good possibility that both of you already have a term plan life insurance cover. Many think of discontinuing the cover for the non-working partner. To continue or not will depend on whether the single-income status is temporary or permanent. "Don't discontinue the life cover at least for two more years. So that by that time you will be able to see if you still want to remain a single income family," Viad says.

Medical Insurance: Parag Paranjpe, Nagpur-based CFP says, "Always have your own medical insurance over and above the employer's medical income. If you are planning a family, there are very few policies that cover maternity expenses. So ensure that your maternity medical policy does not deter you from building a separate corpus."

Focus on Expenses: Whenever a double income family moves to a single income family, you have two options: one reduce your expenses and second dip into your savings. Sadly what ends up happening is that most people land up dipping into their savings instead of reducing their expenses. You will need to reduce or adjust your expenses as per your family's new income. The best way to do this is by reducing expenses.

Loans: If you have loan EMIs running, handling the same amount of monthly EMI outflow could get difficult with a single income. "If possible, renegotiate the interest rate with your lender. If they won't, consider switching the loan to another lender who offers a better deal," Paranjpe says. (To know more on switching, read How to switch a loan). "At times when people quit their jobs and you get some kind of full and final settlement amount or a gratuity, use this amount to prepay a part of your debt like a home loan," Paranjpe says. This will reduce the debt burden to an extent. As far as possible avoid taking on more debt.

Investment and retirement: "If your household income was X and it is going to be X/2, it will definitely need a change in you financial plan," Parenjpe says. You will have to readjust them, as per your needs, dreams and aspirations. Obviously, a need-based plan takes priority over others. Rebalance you portfolio as per you new financial goals and time lines, risk profile. For lay investors, keeping a good mix of equity and debt MFs is a good idea. Keep in mind that moving from double income is not just a financial decision, it is psychological as well.

There will be major readjustments to look into, we recommend you work with a financial planner. You could also use various online tools for budgeting.The decision from moving from a double income to single income is not taken over night, (unless you've got laid off, and you don't have a choice). So prepare for a few months and learn to cut down on small expenses and tweak your financial goals. Many of the aspects will change depending on whether the single income status is going to be permanent or. These are overall steps to be taken. If it is a short affair do it yourself, but if it is going to be for long term, better contact a certified financial planner.

Published Date: Oct 20, 2012 03:59 pm | Updated Date: Dec 20, 2014 08:14 pm