Last week, Firstpost started a series on financial planning with a focus onTwentySomethings - early career people with cash to save and invest.
But what's in it for you, if you aren't a Twenty-Something? And have spouse and kids to boot. Well, here we go, with something that might work for the average nuclear family, but with no financially-dependent parents.
Your life: American author Hervey Allen once said: "The only time you really live fully is from thirty to sixty. The young are slaves to dreams; the old servants of regrets. Only the middle-aged have all their five senses in the keeping of their wits."
The truth is, you will need all the wits you can get in the initial 10 years of your newly-acquired status in the mid-30s, when every responsibility suddenly seems real, unlike in the 20s. When you are in your 20s, you don't even realise how soon time flies, and one day suddenly you find yourself married, with a kid or two, paying for a home loan, a car loan and many other things.
Standing in a never-ending queue for school admission for the elder kid while talking to a client on the phone and simultaneously wondering about the vaccination of your ankle biter. When family, work (ambition) and living the good life take so much of your time, looking seriously into money matters takes the backseat. If you are one such person, read on. If you haven't been smart in your 20s with your money, there's still time to get it right. If you ignore the 30s, in the years to come you will only see your money life get messier.
Start from the start: Just as you begin language classes with A, B, C, you begin a financial plan from the basics: some simple financial goals. This might sound a bit obvious that one must have short (less than five years), middle (7-10 years) and long term goals (20 years plus). But, it's the most important step. For instance, as a short-term goal, you may need to plan for the kid's primary school fees, which could be even as high as Rs80, 000 a year. Or more. Your bow-wow's vaccination could cost up to Rs 25, 000 a year. Mid-terms goals could be a car (may be a second one), a family vacation abroad, kids' higher education; long-term goals could mean buying a bigger house, and retirement needs.
Rainy Day: Emergencies like troubles come unannounced. The best strategy is to be prepared for them. Hence, begin with an emergency fund. Says Sadique Neelgund, a Mumbai-based Certified Financial Planner: "Have at least three to six months' expenses kept aside as an emergency fund. This includes monthly living expenses, lifestyle expenses as well as EMIs for your loans." So, if an emergency arrives, you don't need to take a loan, or ask family or friends for money or even sell your existing assets. This applies to both, single-income and double-income families.
Budget: The next step is to know where you stand financially. Start by gathering all your financial documents and know what your net worth and debts are as a family. Make a budget, and a saving and spending plan. Your monthly budget is generally made of five parts; household expenses, lifestyle expenses, insurance expenses, due liabilities and savings and investments. Increase savings by reducing a few variable expenses like lifestyle expenses (eating out, expensive gadget purchases, for example) . So, instead of movies and mall every weekend, cut it down to every other weekend. Go to the park with your kids instead. You will be surprised how much you will save. Of course, the spouse may not like this, but financial planning for a nuclear family is all about team work.
Dumb Debt: One of the biggest temptations an average nuclear family faces is debt. Most of the salary (or salaries in case of double-income families) goes as living expenses, and other part goes to lenders, meeting kids' demands, and some status symbol expenses. (Let's be honest, we all want to show how successful we are, some time or the other). So credit cards seem like an answer to the problem. Then soon you get into the habit of carrying forward your credit card dues beyond the monthly cycle.
If both partners have credit card debt, the matter becomes even more serious. If you are in such a place, we recommend you visit a credit counsellor right away as a couple. Unless you fix the (card debt) hole at the bottom of the pot, your (money) pot will never get full. Ideally, debt, savings, and living expenses should each account for one-third of your monthly family income around the mid-30s. But that's the ideal and may not apply to your specific needs. Either way, ensure no more than 35 percent of your monthly income goes to servicing the debt. Aggressively start pre-paying debts by trimming down variable expense and by using windfall incomes (bonuses, special performance incentives) for this purpose. Repayment of credit card debt takes priority over any other kind of debt. Jayant Pai, Mumbai-based Certified Financial Planner, says: "Pre-paying, especially home loans, is a good idea. This way you become debt-free sooner and also own the house sooner." If possible, also pre-pay small amounts of non-credit card debts. What cancer could be to your body, irresponsible use of credit cards could be to your money life. So, clean off card debt first.
Medical Insurance: Medical cover for each member of the family is a must. You don't want sickness to erode your savings. The medical cover which your employer offers covers your spouse and kids. But what if you switch jobs? Pai says, "The insurance regulator allows you to port your group health insurance policy to individual health insurance by the same insurer. Check with your insurer is that is possible."
We suggest that you buy a separate family floater policy as well. Neelgund says, "Ensure that it covers at least between Rs 3-5 lakh." Next, look into buying a serious disease disability policy, an accidental death-cum-disability insurance for yourself and wife, if both are working.
If you plan to have another kid, you don't really need to buy a separate insurance policy which offers maternity cover. Says Kiran Telang, another Mumbai-based Certified Financial Planner, "Most group insurance policies provide maternity cover. Don't buy a separate policy with maternity cover. It anyway does not make sense, since the cover is usually very low, around Rs 50,000 while maternity costs could be as much as Rs 1 lakh these days. Instead, you should invest in debt-oriented mutual funds through systematic investment plans (SIPs), to build a corpus for planned maternity expenses."
Life Insurance: Life insurance is a must. Telang says, "If both the partners are working, have a life insurance cover for both. If it's a single income family, say the husband works while the wife is a homemaker, buy a life cover only for the husband." No need to buy a life policy in the homemaker's name, not because her life does not have value but because it is priceless. Telang adds, "As far as possible, stay away from insurance-cum-investment plans. Keep life insurance simple by getting a simple term policy." Buying a term policy online is cheaper than offline policies. Life insurance cover should be equal to 12-15 times your annual expenses or 8-10 times your annual income. Remember to take into account the debts (like a home loan) you owe while deciding for a term cover. That way, your family won't be asked to leave the home if you aren't around. Also ensure that both partners at least make a paper will, to avoid unnecessary hassles.
Investments: The sooner you begin, the bigger the corpus you will be able to build in the long term. Also, as kids start growing up, their education and other needs will also bite into your savings. Your earnings may grow with time, but so will your lifestyle and needs.
For single-income families with a couple of kids, saving is going to be difficult, but you should at least save 10 percent of your income. For kids' higher education, you need to plan savings over 10-12 years. Says Neelgund, "Don't go for child education plans. Instead, just invest funds in equity Mutual Funds and Exchange Traded Funds." Keep in mind, that two to three years prior to kids college admission, to move from equity to debt, so that you don't expose the portfolio to unnecessary risk."
As far as overall investment goes, have a healthy mix of equity and debt, based on your risk profile. If one spouse is a risk-taker and the other prefers risk-less investments, you probably are better off with a 50:50 equity:debt portfolio. Telang says, "Don't start with too many complicated products. Keep it simple. Once you understand simple products then move on to slightly complex ones. As of now, stay away from unit-linked insurance plans (Ulips)." Age-based asset allocation is for lazy investors. Rather, plan your portfolio based on your risk-taking capacity and the returns you need to meet your financial goals.
Retirement: Of course, you want to give your child the best, but that does not mean you ignore your own retirement. Expecting your kids to take care of you and the spouse financially when you'll grow old isn't right in this day and age. They will have their own financial worries to attend to when they grow up. If you truly want the best for your kids, ensure that you plan for retirement well in advance.
Some online retirement calculators can help you get the relevant numbers - how much to save, depending on the number of years left in your career - in seconds. Remember to keep this corpus separate from other financial goals such as vacations and kids' marriage expenses. The Employees' Provident Fund, the Public Provident Fund, and the National Pension Scheme are good retirement tools. Do yourself a favour and never withdraw your PF when you switch jobs to make a short-term status-related expense. Not even if both the partners are working.
Last, no plan is carved in stones. You will have to keep tweaking it as your financial and life status evolves. Good luck.
Next week, Financial Planning for Dinks
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Updated Date: Dec 20, 2014 19:31:21 IST