Fitting the various financial pieces

Let’s admit it; in life, money not only determines whether you meet your financial goals, but also how people relate to you. For instance, if you drive a big car—you are branded as someone well to do. You live in a rented home—you are yet to arrive. It is another matter that you may have borrowed to buy the car and may be financially stretched at the end of the month. Such comparisons can leave you emotionally charged, forcing you to make emotional decisions when it comes to your financial life, which is a sure-shot recipe to a financial disaster in the making.

For most people, by the time they are in their 30s, life is a rollercoaster—many are married, there are children to look after, and there are financial goals of buying a house, a second car perhaps and family vacations. Some people also face the challenge of taking care of their siblings or older parents. In the midst of such a packed routine some natural fallouts are—health, savings, retirement plans and many a times even some skilful handling of your finances.

Financial life cycle
It is one thing to manage your money when you are single and a completely different ball game when you are married. Not only do you have to plan for yourself, you also need to take some collective decisions, which will not only ensure a strong financial foundation but also help you work towards your collective aspirations. “Most people in their mid 30s face rising demands that require larger financial commitments than they are typically used to,” says Tejal Gandhi, CEO and founder, Money Matters.

The two main goals in this phase that most people work towards are child’s education and a house to live in, if not already bought one. Depending on how many children one has, the plan for education goes up that many times. For those who have already got a home, the aspiration is either to upgrade or close the outstanding loan. “There will also be lifestyle-related expenses like vacations, car purchase, home upgrades, etc, which will take up a lot of their money. They would also realise that they need to put away some money for retirement, which will eventually come,” sums up Suresh Sadagopan, founder, Ladder7 Financial Advisories.

“I have a home loan and a car loan that I am servicing at the moment,” says Hyderabad-based N G Jayasimha (33), managing director, Humane Society International’s India chapter. This law graduate’s professional life took an unconventional route and he got into animal activism. His top financial goal includes possible higher studies by taking a sabbatical in the future and his 3-year-old son’s higher education. He is hoping his architect wife Divya’s practice settles soon for him to pursue his dreams. To mitigate health and life risks, he has both health and life insurance.

To make sure that one’s financial foundation is stable, adequate life and health insurance is a must. “In this stage of life, term plan equivalent to 15 times annual income and health insurance equivalent to annual income should be taken as family floater covering all dependents,” says Pawan Mahajan, head—underwriting, Bajaj Allianz Life Insurance. Most often, insurance policies are taken to save taxes, without factoring in the risk protection aspect of these products.

While life insurance is taken by most people, health insurance is something that many overlook. The purpose of a life insurance is to create a financial stream for your dependents in case you die, which is well understood. What many do not realise are the financial implications of meeting with a medical condition that can set you off badly. “The most common mistake is not taking health insurance when you are healthy. People look to buy health insurance only when they are older, are diagnosed with an ailment which is yet to manifest, for saving on tax outgo, or if they have a strong family history of ailments,” feels Dr. S Prakash, senior executive director, Star Health Insurance.

While living on EMI is a reality, doing so with difficulty is a cause of concern. The prudence of taking a loan to fund a house is healthy. However, doing so to fund lifestyle expenses are at best avoidable. “The total EMI amount should be given more importance than the tenure at the time of borrowing. These days a lot of banks do not charge penalty on pre-payment or charge a negligible amount. Hence it is wise to keep the EMI low (up to 40 per cent of your net income) and opt for tenure accordingly. Opting for a high EMI with shorter tenure resulting in financial strain or EMI defaults doesn’t make sense,” advises Harsh Roongta, chartered accountant and a Sebi-registered investment adviser.

Bracing up to changes An aspect of life that is experienced these days in the under 40-brigade is the sense of professional adventurism. Many of them consider starting a venture of their own—some are planned, while some others are circumstantial. Whatever the case, any change to income stream has a direct impact on existing and future financial plans. In 2013, Mumbai-based Mitali Palkar had to quit her job with a leading conglomerate because of some unexpected medical expenses. Not to be perturbed by the situation, she actually used the time off to her advantage by launching ‘Palkar’s Kitchen’, her own catering venture.

“The capital was near zero. I am a good cook and I used the skill to start servicing former colleagues and those living in PG accommodation,” she says. The payoff was good—she made a decent Rs 45,000-50,000 a month and though the venture was exhausting, it allowed her to take care of the family requirements, pursue her passion and not feel the pinch of not working. “It has been a great learning experience, it also taught me the volatile nature of businesses and how one needs to factor in such a scenario,” she says. Around seven months ago, once her domestic life settled, Palkar rejoined an MNC as a client co-ordinator. She, however, continues to operate her catering venture over weekends when she has the time.

Another aspect that seems to fascinate those in their 30s is to plan an early retirement and take a sabbatical to explore new opportunities. There is nothing wrong with this approach as long as it does not hamper existing financial plans and commitments. “Investing on oneself is very essential today with the accelerating pace of change in the business environment. The possibility of becoming redundant is real and hence re-skilling and up-skilling are necessary today to stay relevant,” feels Sadagopan. He encourages such thoughts among his clients and tries to accommodate the same within their overall plans.

Take the case of 37-year-old Mumbai-based Maneesh Joshi, who runs his own film production company. He has two loans running towards his house and car, eating up about Rs 25,000 a month. He has his plans set for his five-year-old son’s education and a bigger house for himself and his own retirement. “We are able to manage our finances comfortably, even though the nature of my business is volatile,” he says. He got into a structured financial plan in 2006, which helped him tide over a period of uncertainty in his business in 2014.

He also nurses another dream. “I aspire to make feature films. The risk is huge in doing so, but I am working in that direction,” stresses Joshi. His production house, The Next Bend Films, is already producing corporate videos and content for television. It is good to be aware of the financial risks involved when one is planning to venture on their own and also factor it in their financial plans.

Sticking to a plan By now, if you do not have a financial plan, you should work towards one, than be left to fend for yourself in difficult times. Higher financial commitments do mean lesser sum to invest, but that should not deter you from continuing to invest. “Once the goals and the timelines are sorted out, then the medium-term goals would have priority over the long-term goals. So, the amount which has been marked to invest for retirement should be left aside,” says Gandhi. At the same time, any additional income by way of increments or bonus must be deployed to achieve financial goals that are larger in value, according to her.

What many people do in this phase is to neglect their retirement plans. “Most people make the mistake of splurging on near-term goals and other items of conspicuous consumption without paying heed to the long-term goals,” feels Sadagopan. Likewise, one cannot afford staying away from investing in equities. “By applying the traditional rule of thumb, which says 100 minus your age must be allocated to equities—70 per cent allocation to equity funds and 30 per cent to fixed income funds will be a typical advice,” says Rajnish Narula, CEO, Canara Robeco AMC. However, depending on one’s propensity to take risks and the timeline for the financial goal, the allocation may vary.

For goals that are a couple of years away, like children’s education, fixed income instruments will have to take centre stage. Wherever possible, though, avoid getting locked into instruments that fetch low returns as they can contribute very little towards your goals. “Find out how much amount you will need for your goals. Then, you should shift to higher returnsgenerating assets like equity. Also, ascertain the surplus which is available on a monthly basis and invest the sum via an SIP in equity mutual funds or direct equity,” says Gandhi.

Yes, smart planning and regular investments can give you the much needed breathing space. So, at no time should you forget the benefit of regular investing, however small it may be. Maximise your tax deductions in a manner that they can support your financial goals. Take a leaf out of Jayasimha, Palkar and Joshi’s financial books to save, invest and dream about your future. Although it is natural to feel bogged down by responsibilities in this phase of life—some discipline and perseverance can ease the burden off your shoulders.

preeti.kulkarni@outlookindia.com