Are we saving enough? This question is asked most frequently by young parents. There is an early phase, when they enjoy the power of their earnings to spend and indulge as they wish. Their confidence about their jobs is also very high. Once a child arrives, there is a sudden anxiety about doing enough and avoiding regrets later. This week is a checklist for young parents.
First, make sure you have bought adequate insurance. Not the complicated products that offer returns defined in various, absolute and relative payouts, but pure term insurance, with adequate riders for disabilities. A young household would not have built adequate assets, unless there is inheritance. Insurance is the essential back-up until they can slowly build wealth over the years for their needs.
Second, conduct a quick check of your existing savings and assets, and find out how much of it is actually available for drawing down in case of need. Providing for job loss or waiting period before finding another is critical. This can be defined as three months of income or six months of expenses. Broadly, ensure you have enough to see you through a rough patch. Rework and reallocate the assets to make sure this asset is liquid and accessible.
Third, make a considered decision about child care and career. It is not easy bringing up a baby and focusing on career. It is especially tough for the mother, who is the primary caregiver for the baby. If you must make a change in your job, terms of work, days of working from home, costs of babysitting and daycare, additional expenses that ensue, prepare ahead. Speak to friends who have managed this phase and make your choices. If you plan to take a break, ensure there are enough assets to fund that too.
Fourth, planning to save more is a good goal to have. This critically hinges on the expenditure pattern of the household. You may not have a detailed budget and accounting habit to know all the details, but broadly know the mandatory heads of expenses: EMIs, transport and utilities, grocery and consumables, wages. Add up to see if these are less than 50% of your income. If yes, you have some breathing space. The lesser, the better. Consider the discretionary expenses: clothes, entertainment, eating out, travel, and the like. These can’t creep beyond 30% of the income. To be able to save 20% of your income is a good start.
Fifth, consider your approach to big-ticket expenses. These can carve out significant chunks of your income. Your decisions to replace furniture, air conditioning, wood work, kitchen appliances, etc., will impair your ability to save. All these look important and mandatory. Do you make these decisions after careful consideration? Do you set targets for years of use so that the expenditure is spread over several months of income? Or do you impulsively make these expenses? To save more, you need to see how wants disguised as needs simply add up.
Sixth, examine your borrowing habits. It is one thing to be confident about future income and commit to EMIs routinely; it is another to suffer the mandatory payout that reduces flexibility when unexpected expenses and the need to save both arise in this phase of life. Do you routinely take personal loans? Do you borrow against your investments? Do you roll over credit card debt? You may be suffering from inadequate income for your lifestyle, or extravagant lifestyle for your level of income, or both. You won’t be able to save consistently till you fix the urge to use what you have, and more.
Seventh, examine your approach to investing. Do you carefully invest the entire balance in your savings account? It is great if you have an asset allocation, and a mix of bank deposits and equity mutual funds. Do you have a mishmash of products in your portfolio, with some stocks and IPOs bought with an eye for extraordinary gains, some SIPs that were discontinued, and a very small recurring deposit going out of your salary? You might still be the unsure saver, who is not clear whether to save or spend. Fix this in favour of savings.
Eighth, begin investing in the child’s name. It might impose a discipline of not accessing this money. Invest in growth products, such as a long-term equity funds that primarily invest in large-cap stocks. Or an index fund, if you don’t know which funds to choose from among the many in the market. Have one or two default products in which all your savings for the child will flow. Don’t create a complicated portfolio that is tough to implement and track. A couple of products and a SIP from the salary account are all you may need. Begin and stick to it.
Ninth, identify dangerous tendencies and keep off. You may not be buying lottery tickets in desperation, but if you are a day trader and punter in derivatives, who is driven by the greed for a quick buck, you are not too different. Your money deserves better. A small portion of your income can be used to indulge in short-term juggling in the markets, if you cannot resist the temptation. However, your life stage may not be able to afford this gamble, as losses will hurt badly. What is good for your long-term wealth and well-being is likely to be boring. Stick to it anyway.
Saving and investing for the child, and for the stable and secure future of the household, need not be a complex exercise. It just revolves around the same four legs— income, expenses, saving and investing. Every household has its unique behaviour with respect to each of these. Get real about your income and protect it; be discerning and deliberate about your expenses; bring discipline to savings; and invest in a simple and operationally easy manner for the long term. This is true for any stage of life-cycle investing. A young couple might discover their own strengths and weaknesses as they put things together for their household.
The Author IS CHAIRPERSON, CENTRE FOR INVESTMENT EDUCATION AND LEARNING
(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)