When you are a single parent, juggling parenting and money management can be overwhelming sometimes, and proper financial planning could be put on the back burner. “There is no scope for mistakes in financial management for single parents and the margin for error is nil,” says Gaurav Mashruwala, a Mumbai-based certified financial planner.
The risk profile for a family headed by a single parent differs from that for a two-parent family. To overcompensate for the absence of a parent, such families tend to spend more and skew family budgets through a myopic focus on providing for the children.
Geet Oberoi with daughter Indya. (Harikrishna Katragadda/Mint)
Single parents often end up neglecting long-term planning. Often, by not having an alternative financial plan by way of a registered will or by not making a decision on legal guardianship for the children, single parents put their offspring at risk. More often than not, single parents err by not focusing on making their children financially literate—an aspect that planners regard as central to the welfare of single-parent families. Mint looks at some of the options available to single parents to become financially smart.
“Once a person has clear-cut goals, the financial planning principles of save, insure and invest are applied to construct a portfolio,” says Srikanth Bhagavat, managing director, Hexagon Capital Advisors, a Bangalore-based wealth management firm.
Take the case of Rock Street Journal editor Amit Saigal, 42, who shares custody of his nine-year-old daughter Aditi.
Saigal, who lives in New Delhi’s Hauz Khas area, is clear that his long-term investment plans for Aditi would be to provide her with a good education and the opportunity to develop her personality. He took out an insurance policy when Aditi was born that will provide her a payout of Rs21 lakh when she turns 18. Saigal sets aside a fixed amount for her school needs and is clear that all spending broadly is education oriented. For instance, he bought Aditi a piano once he realized she had an interest in music. “I have no debts to repay and no mortgages to clear as I am not focused on building assets for her,” he says.
It is important to differentiate between short-term and long-term goals and to invest accordingly. Geet Oberoi, 36, who adopted Indya, 2, almost 18 months ago, now plans to bring home a sibling for her. As Oberoi, also from New Delhi, prepared for a second child, she took stock of her financial net worth, only to realize that though her investments in real estate, farmland and Indian art have appreciated fivefold, they did not give her ready cash for short-term expenses.
“I am now working with a financial adviser to start a systematic investment plan (SIP) in mutual funds,” says Oberoi, who is a special educator and runs Orkids, a multidisciplinary clinic for differently-abled children. “I do not want to focus only on long-term investments that cannot be liquidated.”
Money recognizes no emotions and a good baby step is to start and stick to a monthly family budget. Quantify net income from monthly payslips, adding variable components to the salary —this is the monthly cash inflow.
To tag expenses, separate the money spent into two columns—non-discretionary and discretionary spending. The first column would include all fixed expenditure such as rent, school fees, loan repayments, insurance payments, and monthly household expenses.
The second column would list all non-fixed expenses such as eating out or impulse shopping. If the discretionary spending exceeds fixed expenses, it is time to pull back and let financial prudence prevail. Oberoi says she found she was dipping into money set apart for Indya every time she needed cash in a hurry. “I realized I needed to get a grip of my expenses and work with a qualified adviser once expenses began eating into our savings,” she adds.
Insurance for single parents
Cover risks before investing. For single-parent families, insurance cover must include the child’s current living expenses and also provide for future education in the unfortunate event of death of the only parent.
Jaba Menon, 40, a single mother of daughter Venika, 11, is keenly aware of the requirement. She picked a term insurance policy for Rs50 lakh, for which she pays an annual premium of Rs26,000, as a way to ensure that Venika has a safety net to fall back on.
Jaba Menon and Venika. (Harikrishna Katragadda/Mint)
In addition, New Delhi-based Menon pools in extra money every month to beef up the medical insurance cover provided by her employers. “Single mothers must be aggressive in insuring their risks,” says Mashruwala, who recommends an average cover of Rs10 lakh for a medical insurance policy for a single parent.
For single parents in the age group of 30-50 years, an adequate life cover should be 30 times of current income, financial planners say. “I will work and earn for the next 18 years; that will be the source for our financial security,” Menon says.
Invest, don’t just save
“The biggest financial risk, particularly for single mothers in India, is being overtly cautious with money and being happy with returns of 6% or 9%,” says Mumbai-based Ashvin Arora, director, OptiMix, an investment solutions provider, which is a part of ING Investment Management (India) Pvt. Ltd.
As a rule of thumb, it helps to divide into two parts the surplus cash available after monthly expenses. In the first year, invest 80% on debt instruments that have less volatility, such as income funds, post office schemes, and short-term bank deposits; invest the remaining 20% in equity funds. In the subsequent years you might want to consider your risk appetite and invest proportionately on debt and equity.
Menon, who is now looking to start an SIP in mutual funds, is clear that she needs to build up a nest egg of at least Rs50 lakh. “Just by saving from salary I know will not give me enough to fund an overseas college degree, so I have to invest in equity,” says Menon.
“A serious financial mistake single parents make is in not writing out a will or appointing a legal guardian for their children,” says Hexagon’s Bhagavat.
Amit Saigal with Aditi. (Harikrishna Katragadda/Mint)
Legal guardians must be picked and legalized formally. In addition, it is important for single parents to start a long-term retirement plan. Up until now, Joydeep Ghosh, 43, who shares responsibility for his daughter, 14-year-old Sreejita, has focused on saving for her college education.
Sreejita wants to study veterinary sciences and Ghosh plans to send her overseas for a specialized degree and to that end, puts away anything between 18% and 24 % of his monthly earnings. “Normally, retirement planning is discussed over evening tea, but in the case of single-parent families, that gets missed out,” says Ghosh, a New Delhi-based freelance sports writer, who now hopes to chart out his own long-term retirement plan.
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