BackSingle person finances need even more attention
You need the threshold of an emergency fund which is about six months of your living costs
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Afinancial plan needs to be re-looked after regular intervals as the needs of a person may change. Also, there is no one-size-fits-all plan available. Monika Halan, editor, Mint Money, and Vivek Law, editor, Bloomberg TV India, discuss the nuances of a financial plan and changing needs. Edited excerpts:
Vivek: How does a single person’s finances vary from that of a married person’s? How do your money needs, or money boxes, change if you are single compared with when you are married?
Monika: Marriage brings about responsibility. When people get married, they suddenly realize how important money is. We get many questions from people who just had a baby or are planning one. A child does make you a little more aware and a little more responsible. There is enough research that comes out of the US, unfortunately we don’t have that research here, which says that married people have significantly higher income levels than single people. Single people will have an income which is about 70% that of a married person. There is something about marriage that gives you responsibility and stability which showcases itself in increased income. So the first part is the potential to earn better. The second part, of course, is that in a twin-income household, there is an economy of scale. Then there are tax benefits. If two people buy a house, they can both avail tax benefits on principal and interest deduction. Now what should the money box look like? You need the threshold of an emergency fund which is about six months of your living costs, you need a robust medical cover and you need a retirement fund, especially if you are single because you are looking after your own future and there is no spouse to fall back on. Single women, either through choice or divorce or widowhood, must remember to save for their retirement too.
Vivek: How does the game change if you are a single parent compared with only being single? I am asking from the point of view of insurance. So if you are single and you don’t have dependant parents, then do you go in for big insurance at all if you intend to remain single?
Monika: If you are a single person with a child, you will need a life insurance, whereas a single person who has no children or other dependants does not need a life cover. Your medical cover needs will increase and the goals of funding the child’s education and marriage are also completely on your shoulders.
Vivek: Shudeep is joining us from Kolkata. I understand you are a banker and you have some concerns.
Shudeep: I am in a project wherein I will be getting around 60 lakh. I am going into the project with my plot. I will have to give away 40 lakh in two years and I will keep 20 lakh. So in these two years, I want to park my money in an instrument wherein I get maximum return and the principal amount is intact.
Monika: I see a box which has a strong income inflow and surpluses. Despite a physical challenge and being confined to a wheelchair, the box looks fairly well funded. Your wife is a foreign national and is financially independent and you have a dependant mother. I see a mess of life insurance policies, some medical covers and the most interesting thing is something you have already touched upon which is the plan to unlock the real estate you own. A lot of what I am going to talk about hinges on that decision that you have taken.
You are going to hand over your house to the builder. You are going to keep 4 flats, 2 that you plan to keep for yourself and the remaining 2 you will rent out. The rent is possibly going to be enough so that if you were to decide to do something on your own, you will have the luxury of quitting your job in some time. So I am going to take two minutes to clean out your money box before we get your question of allocation of money.
Everybody needs an emergency fund; six months of living cost in an easy to access place such as a fixed deposit or a short-term debt fund. Now you do have a medical cover from your own company but I do recommend a personal cover and for your wife and mother as well. A 5 lakh cover for each plus a 15 lakh floater on top of that. Look at Mint Mediclaim ratings so that you can pick the best cover. Now coming to life insurance; there are a couple of money-back policies which you have recently bought. These policies neither give you enough life cover nor do they give you good returns. So I am going to ask you to bite the bullet and stop paying premiums. It is of course a loss to you considering the premiums that you have already paid but given that these policies still have 10-15 years left for funding, I think its better to cut your losses now. You don’t really need a life cover because your wife is independent. There are enough assets for your mother to live off if something were to happen to you. So don’t buy a life cover unless you plan to start a family. If that were to happen, you will have to reconsider this decision.
Now your key question is about 40 lakh you have to give back in two years and 20 lakh that you get to keep. You want something which gives you good return but no risk. Unfortunately that does not exist.
Your safest option is a fixed deposit where there is a 100% guarantee on what you get. But I think you want something a little better than that. So let’s do an asset allocation.
We like diversification because it reduces the downside risk. Let’s look at 40 lakh first. Put 20 lakh in a fixed deposit. The rest of the money you split into two parts. A fixed maturity plan (FMP) from a good fund house with a maturity horizon which matches with what you want, and a short-term debt fund. For the 20 lakh you get to keep, put it in a low equity exposure balanced fund so that it backs your investments.
Write to mintmoney@livemint.com OR sms at 9773270010. Type SM, give a space, and write your query.
Catch the show on Friday: 08:30pm, Saturday: 06:00pm, 08:30pm, Sunday: 10:00am, 12:30pm and 05:30pm o n Bloomberg TV India.
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