Financial security mantras and why women should consider planning for it

Since they may take breaks from their careers to raise children, and often, outlive spouses

Even though the basic tenets of financial planning are not very different for men and women, there are life events that affect the latter more than the former. Many women choose to take an extended break from work to raise their kids. In addition, they tend to live longer than men. Combine both these aspects and it becomes apparent that women have fewer years to earn and more years to live. This in itself suggests that women should plan their finances aggressively. However, this does not always happen.

Get more proactive: When it comes to financial planning, women often take a backseat, leaving the task to their husband or father. Not just housewives, even women who have climbed up the corporate ladder leave the management of personal finances to a male member of the family. This mindset needs to change.
 

Usually, in case of working couples, the lady’s involvement is much higher at the beginning. But gradually her interest wanes. Sometimes, women shy away because they find all this too complex, or boring, or because they feel they may not be able to add enough value.
 

Even though investments are made in the woman’s name using the money earned by her, she is often not the one taking the decisions. Even women who enlist a financial advisor’s help must understand why a particular investment is being made. She must be in the position to ‘pull the trigger’, that is, decide whether a particular investment makes sense and will help her achieve her goals.  

Be aware of family’s investments: Many women, especially housewives, are completely clueless about the various investments that their spouses have made. In India death is a taboo subject. But how long can one stay away from life’s harsh realities? What good is any investment if the wife can’t access it in case the husband passes away early? Therefore, be pragmatic. Sit down with your husband and take inventory of all the investments done and insurance plans purchased by him.

Understand investment and insurance: Besides getting a good job and becoming financially independent, women also need to learn to invest their savings smartly so that they grow. Often, after the husband’s demise, the wife gets life insurance proceeds.

With little knowledge of personal finance, she is at the mercy of agents who get her to invest in high-cost and low-return products which may not even be suited to her needs. Her poor decision-making often puts her children and her own and financial security at risk. It is not possible to become smart about investment decisions overnight. Such knowledge can only be built by being an equal partner in financial decision-making from an early stage.

Plan for career break and longer life span 

• When you are single and have few liabilities, save around 30 per cent of your salary
• Repay your education debt at the earliest
• Avoid splurging and ringing up debt
• Once you get married, contribute to common family goals
• Be aware of where money is being invested
• Ensure that your spouse’s activities don’t hurt your credit profile
• Ensure that you are the beneficiary in life insurance products and the nominee in your spouse’s other financial investments

Educate yourself and act: If you haven’t started already, begin reading up on personal finance. Read the personal finance sections of leading business newspapers, blogs and personal finances magazines regularly. On the fixed-income side, get acquainted with products like Employees’ Provident Fund (EPF), Public Provident Fund (PPF), bank and company fixed deposits, tax-free bonds and debt mutual funds. On the equity side, educate yourself about the different categories of equity mutual funds — large, multi-, mid- and small-cap, tax saver funds, etc. For each of these products, familiarise yourself with their return, risk, liquidity and taxation.  Among insurance products, educate yourself about the essential types of insurance like term, health, car and household.      

After you have done some reading, start acting on your knowledge. Start small, make mistakes, and learn from them. Track your investments. You should also maintain a diary of your experiences, and share and debate your learning with family and friends.

Don’t avoid equities entirely: When it comes to investing, women often tend to be far more risk averse than men. But sticking to a 100 per cent fixed-income portfolio may not be enough to create wealth. The inflation-adjusted, post-tax return from fixed-income instruments often tends to be very low. Gold, too, should find a place in long-term portfolios, but to the extent of 10-15 per cent, to act as a diversifier of risk. Otherwise, in long-term portfolios (where the goal is seven years or more away), a large portion should be filled with equities. Begin with large-cap mutual funds, which tend to be less volatile, initially. As you grow in confidence, add multi-cap and mid- and small-cap funds to the equity portion of your portfolio.

Create a contingency corpus: Besides saving for bigger goals, you need to create a corpus for a variety of contingencies like accident, illness and job loss. This will ensure that in case any of these eventualities does occur, you will not have to dip into your savings. The contingency fund should equal at least six months’ income. The money should be invested in a liquid fund where it is easily accessible.     

Plan for maternity break: If the break is going to be short, plan only for regular expenses. The accumulated corpus can be put in a liquid fund or an ultra short-term debt fund and money can be withdrawn through a systematic withdrawal plan.  Nowadays, many employers provide paid maternity leave, which to an extent does away with the need to plan for such breaks.

However, if the break is going to be a long one to raise the kids, then both the husband and wife need to realise that their investible surplus will go down once the wife quits working. When taking a loan, say, for a car, be conservative. Take into account the fact that the family’s ability to service loans will decline once it goes from being double- to single-income. Other crucial financial goals may have to be deferred. The couple may, therefore, need to save and invest more aggressively while both are working.

Save for retirement: Learn about the life span of family members from earlier generations. This will provide a basis for the number of years that have to be provided for post-retirement. If there is a big age gap between the husband and the wife, then planning has to be done keeping in mind the age of the latter. Also, create a will to avoid succession-related issues.

The writer is founder, PersonalFinancePlan.in, a Sebi-registered investment advisor