The number of people in the average urban Indian home is dwindling.
Quick Fact : The Ministry of Statistics and Programme Implementation in its report ‘Selected Socio-Economic Statistics, India 2017’, has indicated that the average number of persons per house in urban India has shrunk from 4.9 to 3.4 in just a decade.
Nuclear families have become a defining characteristic of urban life in India. That means your financial planning practices need to keep up with the changing culture, incomes, and expenses.
Common investment mistakes, going by a recent financial planner survey, include –
- Investing too much in physical assets such as gold and real estate,
- Mixing insurance and investment,
- being under-insured,
- high-interest loans,
- poor savings and investment management, and
- the general lack of estate planning or preparing your will.
In this article, we shall explore how small families can invest wisely with an informed approach toward financial planning, debts, insurance, property, and retirement, among other important aspects.
8 Important Investment Tips Nuclear Families Can’t Ignore
1 – Financial Goal Planning
Your first step should be to identify key financial goals, both immediate and long-term, that you need to achieve as a family. Here are some helpful questions to keep in mind –
- Do you need to purchase a vehicle? If so, when and at what amount?
- When do you want to buy a property, at what value and what can you make as a down-payment?
- What expenses would be there on the arrival of a new baby?
- How much should you save for your children’s graduation and post-graduation?
- What are your retirement needs?
- What are your typical monthly expenses and how are they likely to change?
- How will your income change in the year ahead?
- What is the assumed rate of inflation and return?
- How much insurance does your family need?
Use one of the many popular financial planning tools available and work out a plan for your unique requirements. You should also try to understand the most important Personal Finance Ratios.
2 – Budgeting
Whether one member of your nuclear family is earning or both, it is critical to budget your expenses. Make a monthly budget, and have a spending plan comprising of household expenses, lifestyle expenses, insurance, servicing debt, savings, investments and other miscellaneous items.
3 – Debt Management
Typically credit card interest rates and personal loan rates are the biggest sources of debts (also called as dumb debt) for families in the urban context. Avoid overspending or borrowing beyond means. A typical thumb rule is that your fixed obligation to income ratio should not be more than 30%to 35%.
Simply put, you should not have debt-related payments (interest, periodic principal payments, EMI) of more than one-third of your income. If you have high-interest loans, strive to save and repay unless you are confident of better returns elsewhere.
4 – Insurance Planning
- Life Insurance: Ensure you have adequate life insurance for earning members in the family. The objective would be that the lifestyle of dependents does not undergo a drastic change on account of the loss of a bread-winner. A thumb rule is about 10 times your annual income or annual salary multiplied by years to retirement.
One way is to go about with a term life insurance plan, rather than mixing insurance and investment needs. Other factors include employer-provided cover (which cannot be always relied upon), current liabilities, accumulated wealth, and your spouse’s earnings.
- Medical Insurance: Medical insurance should ideally cover health insurance well into old age and possibly till death as well. You may want to obtain a family floater policy to cover your needs, and not just rely on employer-provided cover. It’s a good idea to have at least Rs. 5 to 6 lakh cover for a small family.
- You can also enhance your Health insurance cover with a Super Top-up Health Insurance plan.
- Though most nuclear families live independently, you may need to provide medical insurance for your parents as well, should they not have any coverage of their own.
An increase in the family size or an increase in financial liabilities may require a corresponding change in your family insurance cover –for example, an increase in a family floater cover in case of a new-born, or an increase in life insurance cover in case of a home loan.
5 – Investments
Your investments need to have a healthy mix of debt and equity.
Debt is a good candidate for relatively stable returns for short-term needs, while equities are risky and typically oriented towards long-term returns. Various options exist, right from bank deposits, to high-quality deposit schemes, and equity, debt, and balanced mutual funds, to active investing in the markets.
Understand what kind of risk factors are your investments subject to. Ensure your investments take care of children’s higher education and marriage expenses, your retirement, and other aspirations you may have (a second car or home, land, entrepreneurship, etc.).
Categorize your family goals and investment needs into essential, lifestyle, and aspirational, so that you can align with your risk appetite. These goals may be assessed in terms of their horizon – short-term, medium-term and long-term to plan for appropriate investments. The investment horizon, the criticality of the need, and the size of the goal play a key role in deciding the quantum and nature/asset class of the investment.
Short-term goals (within say, 2 to 3 years) will require stable investments like debt and deposits which are less volatile. Medium-term goals (say, 4 to 8 or 10 years) will require a judicious mix of equity and debt, whereas long-term goals (8,10 years or beyond) can be amenable to riskier investments (equity related).
Different asset classes – high-quality debt, deposits,equity, real estate, and gold (and maybe even commodities) can be holistically considered based on the risk profile of the nuclear family. You will need to revisit your financial plan periodically, and on the occurrence of life events such as a new-born, increase in income, or the purchase of a home.
If you have to move into a new city and you have small children, consider a financial plan covering the following, keeping in mind your income, risk appetite, and goals:
- Rental outflows
- Child-related expenses
- A possible new home
- Short, medium, and long-term financial savings and investments
- Healthcare-related expenses for immediate and extended family
You can use Systematic Investment Plans (SIP), build an investment portfolio covering various asset classes, and maintain a family balance sheet and income statement. If you are in the HNI bracket and above, consider alternate investment avenues.
Remember that the earlier you start investing, the better it is for your family.
This is a very important consideration for nuclear families. If it’s possible, it is good to invest in your own stable place to stay in a city. If you plan to buy a home,you need to start saving to make the down-payment, servicing EMI for a home loan, and payments / pre-payments, leveraging various investments and savings you may already have. Buying a property is an important financial and emotional decision for a nuclear family, with the location, lifestyle, and children’s needs being critical factors.
- Retirement Planning
In addition to the usual Provident Fund (PF) savings, you should consider planning ahead for retirement, based on projected costs at that time. The situation will be very different and you will need to live off your savings or the returns from those savings.
Your retirement plan, which can be part of your investment plan, should ensure you are able to maintain your lifestyle through a retirement corpus. Keep in mind that, as with other investments, the time horizon and the size of the corpus will play a key role in the funds you allocate and the nature of your investment.
For example, as a 25-year-old you can start investing in equity with a smaller initial investment outlay, as compared to when you are in your mid-30s. As you get closer to retirement, you will need to move your investments to safer asset classes.
8 -Last but not the least – Liquidity
A nuclear family should have enough liquidity or cash to meet emergencies. This should be about 6 months of expenses in case of unfortunate situations, such as a job loss, critical illness, or other unforeseen events.
Also, you never really know when the death of a family member may occur. Estate planning is often ignored even in the most educated of households. So, keep a record or inventory of everyone’s accounts,holdings, property, liabilities, and investments in a safe location. Ensure nominees have been added. It is always a good practice to have a will in place so that everything is very clear.
Larger aspirations such as giving back to society and other personal goals apart, you should ensure that your family stays on track to attaining the right financial goals for the well-being of family members and dependents.
Investment planning need not come easy for everyone – so don’t shrink from taking advice from a professional financial advisor. But if you are the DIY type, there are short, interactive, online courses on financial planning and investments, created by subject matter experts with tons of expertise.
Remember -having a proper financial plan is one of the most important factors towards happy living for nuclear families. Money cannot buy everything in life, but it sure can buy you a lot of things!
This is a guest post by Niyati Jetly, business development manager and evangelist at Centre for Investment Education and Learning (CIEL)
Continue reading :
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Kindly note that ReLakhs.com is not associated with CIEL. This is a guest post and NOT a sponsored one. We have not received any monetary benefit for publishing this article. The content of this post is intended for general information / educational purposes only.
(Image courtesy of arztsamui at FreeDigitalPhotos.net) (Post first published on : 13-December-2018)