Source - www.rediff.com
When it comes to making investment decisions, women tend to shift this responsibility on their close family members. While trusting one's close family members is not wrong; completely depending on them can lead to trouble when one is left alone. The reasons could be an eventuality in the family or a separation from spouse.
Separation leads not only to emotional distress but can also make women financially handicapped, especially when they are not working or the spouse was managing the finances. Therefore, to secure one's life financially, it is important for women to have a financial plan.
This case study deals with a client i.e. Ms Asha Sharma (name changed to protect the client's identity), who was divorced and required assistance in financial planning.
Facts of the case
Ms Asha Sharma is 32 years old and is working as an Assistant Manager with KPO with post-tax salary of Rs 30,000 per month (pm).
She has a 5 years old son.
She had taken a car loan for 5 years @ 12 per cent; the EMI for this comes to Rs 8,500.
She had taken a joint home loan for 2BHK apartment with her ex-husband for 20 years; the EMI for this comes to Rs 25,000.
Her total monthly expenses are Rs 24,500 p.m.
Current Portfolio
Instruments | Corpus (Rs) |
Public Provident Fund (PPF)* | 50,000 |
Fixed Deposits (FD)* | 120,000 |
Cash | 100,000 |
Gold Jewellery | 100,000 |
Total Assets | 370,000 |
* PPF will mature after 11 years and FD will mature after 5 years
Our observations
Ms Sharma cannot maintain the same lifestyle given her current circumstances.
Her investments were in conventional fixed income instruments with no exposure to equity.
Her loans i.e. car loan EMIs and home loan EMIs took away more than 50 per cent of her salary.
Before separation, she was dependent on her husband for her personal expenses.
She was not familiar with different investment avenues.
The course of action
After conducting several rounds of discussion with Ms. Sharma, we identified her immediate and long-term goals. Her immediate goal was to buy a house. The long-term goals were buying car, saving for her child's education and her retirement.
The table displayed below summarises her financial goals and time horizon.
Financial goals | Time horizon | Future cost |
Buying a house | 5 | 675,000* |
Son's Education | 12 | 3,000,000 |
Retirement | 28 | 11,200,000 |
* Comprises down-payment (35,00,000 X 15 per cent) + 150,000 of stamp duty & registration
Assumptions
We advised her to maintain at least Rs 100,000 in bank account to meet any contingency.
Interest income on cash is not considered as part of her monthly income.
We assumed her salary will grow by 10 per cent p.a. and inflation will increase by 6 per cent p.a.
We have not considered the impact of alimony in this case study. However, for women in similar situations that can be an additional source of income.
The current house will be either transferred in the name of her ex-husband or sold. We assumed that there was no profit generated from this transaction.
We assume her life expectancy to be 75 years.
We have assumed return of 7 per cent p.a. post-tax on investments in fixed deposits and equity.
Solution
1. Cut down expenses
We started Ms Sharma's financial planning by projecting her monthly cashflows by getting the break-up of income, expenses and savings. The table below shows that her monthly expenses were more than 90 per cent of her salary, which led to negligible savings.
Hence the first advise was to stop spending liberally on things that were secondary for her day-to-day operations.
To name a few, spending on movies, dinner, vacations, shopping are some of the expenses that she was advised to cut down on. Spending more can lead to increase in debt and reduced savings, which in turn would delay her financial goals.
We advised her to sell her current car and prepay the loan and defer this goal by 3 years.
Monthly Budget | Current | Recommended |
A. Salary | 30,000 | 30,000 |
B.Total Expenses (a+b+c+d) | 24,500 | 18,000 |
a) Household exp. | 15,000 | 9,000 |
b) Child's Education | 1,000 | 1,000 |
c) Car EMI | 8,500 | - |
d) House Rent | - | 8,000 |
C.Total Savings (A-B) | 5,500 | 12,000 |
2. Opt for Insurance
The most important financial instrument that was missing in her portfolio was insurance. Insurance helps the insured's dependents in case of the eventuality. In this case, her 5-Yr old son was the sole dependent and has at least another 15 years before which he can take care of himself financially. Hence we suggested her to opt for term insurance policy for cover of Rs 50 lakhs (Rs 5 million) for 20 years. The annual premium for this comes to Rs 14,000.
Next we advised her to opt for medical insurance with insurance cover of Rs 500,000. The premium for the same worked out to Rs 5,000 per year.
3. Buying house
Based on her income, financial commitments and ability to service the loan, we advised her to opt for a 1BHK house worth Rs 35 lakhs (Rs 3.5 million). She should avail of home loan for 85 per cent of the cost. We advised her to stay in a rented apartment till the time she is able to accumulate the corpus for the down-payment and the stamp duty and registration fees. The monthly rental worked out to Rs 8,000 p.m.
Next step was to make a plan for accumulating corpus of Rs 675,000. The stamp duty and registration charges of Rs 150,000 will be taken care by the fixed deposit which will mature after 5 years. For the down-payment of Rs 525,000, we advised her to invest Rs 7,300 p.m. for next five years, assuming return of 7 per cent p.a. post-tax.
4. Son's education plan
Ms. Sharma wishes to send her son to engineering college after completion of junior college i.e. after 12 years. The estimated expenses for the same worked out to Rs 30 lakhs (Rs 3 million). We advised her to avail education loan for 80 per cent of the estimated cost. For the balance cost of Rs 600,000, we advised her to invest Rs 2,700 p.m. for next twelve years, assuming return of 7 per cent p.a. post-tax.
5. Retirement planning
Ms. Sharma plans to retire at the age of 55 years. Given her current financial commitments, she cannot start planning for her retirement immediately. Hence, it was suggested that she start her retirement planning from the age of 43.
Her expenses post-retirement will comprise of:
Assuming growth of 10 per cent p.a. in salary, we expect her salary to be Rs 10 lakhs p.a. (Rs 1 million) at age of 43. Considering her current household expenses and travelling/healthcare expenses; her retirement corpus worked out to Rs 1.12 crores. Accordingly, she was advised to invest Rs 44,200 p.m. from the age of 43 years till the age of 55 years, assuming return of 7 per cent p.a. post-tax.
Summary of Financial Plan
Financial goals | Time | Future | Start investment | Investment | Investment required per month | CAGR |
Buying a house | 5 | 675,000* | 32 | 5 | 7,300 | 7% |
Son's Education | 12 | 3,000,000 | 32 | 12 | 2,700 | 7% |
Retirement | 28 | 11,200,000 | 43 | 13 | 44,200 | 7% |
Asset Allocation
The risk-appetite of Ms. Asha Sharma is moderate. Hence we recommended asset allocation of 45 per cent in equity and 55 per cent in debt. As she does not have the required skill sets to invest in equity directly, we advised her to invest in equity mutual funds via SIP route. For debt investments, we advised her to invest in fixed deposits and debt mutual funds. We also advised her to invest in tax efficient products like ELSS and PPF to save on taxes.
In conclusion...
Women whether single, married or separated should carefully plan their finances. Women who find themselves in similar situations should follow these steps:
Take stock of your finances: Indentify key financial goals such as child's education.
Find a financial advisor: Seek help of experienced and competent financial advisor who can build a financial plan and suggest appropriate investment avenues.
Identify your risk appetite: If you cannot handle volatility in your portfolio then keep the equity allocation low. Risk-appetite of each individual is different. Hence the asset allocation will vary from person to person.
Buy Insurance: The insurance cover should depend on the monetary value of all yet-to-be fulfilled needs of the dependents plus all outstanding liabilities.
Save more, cut-down expenses: Saving is important for the success of one's financial goals. It's very important for individuals to understand that they cannot afford to maintain the same lifestyle post-separation. As the total income reduces, so should the expenses.
Review your financial plan: It is important to review your financial plan with your consultant at regular intervals. The changes in equity market, risk-appetite, goals etc would require change in the asset allocation.
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