Tuesday, September 30, 2014

Your life, your money. Take control

The following story was written from the perspective of the Indian economy but the planning advice is sound and should be considered by all.

Financial planners are unanimous in saying that when it comes to making investment decisions, women rarely take an initiative. There is a sense of being overwhelmed by numbers and statistics which, say planners, women find difficult to digest. More often than not, they rely on other members of the family, maybe husband or father, to make investment choices. But social dynamics are slowly changing. More women are earning independently from an early age and, at the same time, getting married later than sooner. Then why not invest money independently?

A study commissioned by DSP BlackRock Investment Managers Pvt. Ltd and conducted by global research agency Nielsen across 14 cities in India in July 2013, found that only 23% of working women make their own investment decisions. The figure for single working women is even lower at 18%.

Making investment decisions is linked to financial planning. Although this may sound daunting, it is a simple exercise about allocating resources to achieve future goals. However, you need to approach it in context of your current and future routine. You can draw a broad outline of your finances based on the stage of life you are in now and then keep adjusting for changes as they happen.

The planning process

Planning has to be done around an objective. “There has to be a context to planning and investing,” said Suresh Sadagopan, a Mumbai-based financial planner.

The objective could be an important one like your 13-year-old child’s college education or it could be your desire to travel around the world. Objectives will depend on individuals and their lifestyles. But to achieve these objectives, you need to plan ahead.

For single earning women without any children, the objectives could be linked to buying a car or a house or taking care of elderly parents. For an earning married woman whose spouse is also earning, it could be all these and the need to plan for a child. There are a lot of expenses around childbirth and you can actually invest in advance to cater to some of these.

Many married women who are working may be looking to take a sabbatical when the baby is born. Therefore, investing to provide for the months without the second income is also important. Some of the gap can be compensated through planned investments.

But the one goal that is common to all women, irrespective of age and status in life, is retirement. Whether you have just started earning or have been doing so for 20 years, at some stage you will retire. And at that point, you won’t want to give up the lifestyle you are used to living.

Many women make their retirement their spouse’s responsibility. That’s not the best thing to do. According to Nisreen Mamaji, founder, Moneyworks Financial Advisors, a Mumbai-based financial planning firm, “While working women do give some thought to retirement, non-working married women almost never plan for their retirement. But it is important for them to at least be aware and involved in the retirement planning investments because in the eventuality of the husband not being there, she will have to manage her family and finances single-handedly.”

That’s not the only reason that women should plan their own retirement. “The way to look at it is different. Many women actually retire early to take care of their families and hence, have to plan for the gap in income which they were earning,” said Aditi Kothari, executive vice-president and head of marketing, DSP BlackRock Investment Managers.

Once your objectives and the context to your financial planning has been set, you can then decide the products through which you can achieve these goals. This could be an appropriate mix of various products such as fixed deposits, provident fund, equity and debt mutual funds, among other things.

Cater for contingencies

Other than investing to meet financial goals, you must think of contingencies. You could do all the planning, but in the event of unforeseen circumstances and loss of life, things turn around completely.

A loss of life can be covered through insurance. If you are a single working woman without any dependants, this may not be your primary concern. “Insurance is meant to cover financial dependency and it’s not needed if death doesn’t result in a financial loss to next of kin,” said Sadagopan.

However, if you are single and have a loan running, there is merit in being insured, at least enough to cover the loan amount so that the liability doesn’t fall on your kin.

Married, and children, make financial dependency really gain pace. “If both partners are working, insuring the loss of income in the unforeseen event of death for both is important,” said Mamaji.

Often, even a working mother doesn’t assign too much importance to her own life to cover the eventuality of death. However, if the family is accustomed to a particular standard of living that has been made possible thanks to the joint income, then filling that gap is important. Thus, insuring both earning members of the family helps protect the loss of income, which the rest of the family is dependent on.

If you are not working and your spouse is the only financial provider for the family, you need to be aware of how much insurance is there in his name. You need to know whether in the eventuality of the spouse’s death, critical aspects such as your daily lifestyle, children’s future education and marriage are catered for. Since he is the sole earning member, his death will create a big income gap for the family and this can be covered through term insurance.

The other emergency that may take place is health related. These are also hard to predict and can get exaggerated if there are unforeseen occurrences such as accidents. “Medical insurance is necessary for everybody, no matter the age and status in life,” said Sadagopan.

In a study, ICICI Lombard found that premium contribution by women towards health insurance increased by 38% in 2012-13 from 2011-12. Women even have the option of taking on medical insurance that has maternity benefits.

What should you do?
Financial independence for women can’t just be about earning their own money, but also about how they manage it and secure their and their family’s future, said Kothari. “Today, more women are earning independently but divorce rates are also increasing. Moreover, women tend to outlive men. There are good options for investments but many women don’t know what to do,” she said.

The foremost step towards financial planning is to become aware, which means understanding how you can make your money work efficiently for you over a number of years. The objective could be to ensure your family’s financial security, your retirement or even just your travel dreams, but the approach has to be to embrace a planned personal financial management and goal-based investing.

A part of being aware is to get the details right. Ensure that you name dependants as the nominees in these investments and insurance policies. Also, it is a good idea to work on a will when you know who you want to be the beneficiary of your investments. Even if you have no dependants, it may be wise to draw up a will so that your family does not have to bear the burden of any liability.

Financial control is the biggest tool in your hand. Use it, and use it well.

Written by Lisa Pallavi Barbora  Published Mar 2014 here.  

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