Financial Planning Case of a Woman

Women are known to be smart saver then men. But when it comes to investing their money, the decision rest with the spouse or family members. However, with uncertainties surrounding us there can be eventualities or a situation like separation from spouse. Unawareness on financial matters can lead to financial unstability. Hence it’s very important that planning is done by women to ensure they are able to take sound decisions and don’t have to rely on others when in need.

This is a case of Mrs. Lata Chaudhary, a woman separated from her husband few years back and taking care of her 10 year old daughter.

Summary

Mrs Lata Chaudhary, age 40 works with a software firm as a Sr. Manager-HR. She has a 10 year old daughter. Her monthly income is Rs 60000 and monthly expenses are Rs 35000. She stays in a house gifted by her father and owns a car. She is invested in various financial instruments and has some amount of insurance through traditional polices. Given below are her investment details:

 She is able to save Rs 25000 monthly but have not allocated it as per her goals.

Following are the goals she need to fulfill:

• Assuming inflation of 7% and Education Inflation at 10%

Recommendation

1. Emergency Funds– She should keep 8-10 months expenses as emergency funds considering she I single & does not have any other support for income. By allocating money from savings bank account, FD & RD she can meet this requirement comfortably. Part of this money should be invested in Money Market Funds for tax efficiency. The rest can be continued with the bank alternative.

2. Insurance Planning: She should discontinue traditional plans which are not matching her requirement. Disability Insurance should be the first priority which will support her income in case of any unexpected happening. Next, she should consider a term insurance. With her age & income she is generating, she should be covered for at least Rs 75 lakh. She can avail a term insurance through online which will be cheaper. Although, she is covered for a group health scheme from employer, she should purchase a standalone policy of Rs 5 lakh covering her and daughter. This will prepare her for medical emergencies in future .All these insurance will cost her approx. Rs 40000 p.a. which can be allocated from savings of existing life insurance premium.

3. Daughter Future Planning: For her education she require Rs 25 lakh in 7 years. Since it will be difficult for her to accumulate such a huge corpus, she should avail education loan of 60% of the amount i.e. Rs 15 lakh, part of which will have to bear by her daughter when she starts working. For accumulating Rs 10 lakh she can utilize PPF proceeds which will mature after 7 years and will give her Rs 13 lakh considering average 8% return. For her daughter marriage gold investment will fetch her Rs 16 lakh .For balanced corpus, investment of Rs 5000 p.m. in balanced mutual funds scheme is recommended with assumption of 12% p.a. return. This will meet her daughter’s future requirement.

4. Retirement: Mrs. Lata wants to retire at age 55.She has 15 years to accumulate. Her retirement expenses will majorly comprise of medical cost, household expenses and travelling. Considering longevity of 83 years, she will require a corpus of Rs 1.82 cr. Her EPF accumulation will give her approx. Rs 50 lakh. It will be difficult to allocate huge surplus for retirement at this stage. She can start investing Rs 10000 p.m.  divided between PPF and Balanced MF Scheme. She can also look at decreasing her expenses further, if viable, so that she is able to save more. As her salary increases or any surplus received from job, she can allocate more towards this goal. Alternatively, she can consider rental income from her house or reverse mortgage, along with increasing her retirement age to 60.All these strategies will require periodic review of her financial situation.

5. Asset Allocation: Being single and with responsibility of a daughter, her risk appetite is low. But she needs to allocate her assets in right asset classes to meet desired goals. For long term, equity exposure through mutual funds is advisable. SIP is the best option for her to diversify the risk. For debt exposure PPF, EPF and Debt mutual Funds should form the core allocation considering tax efficiency.

Conclusion

There are many changes which happen in life. Some of them you are able to accommodate comfortably while some may impact you financially. It’s important to plan your future financially irrespective of your living status. Single, Married or Divorced, financial planning helps women in planning for their goals and becoming self-dependent in case of any eventualities.

As Published in Business Bhaskar