Financial Planning for Household (Tips for Homemakers)
It has been said that you should plan your future and save for retirement but with changing times, rising costs along with skyrocketing inflation savings seems a farfetched idea and almost unrealistic still being a consultants and financial educator I proposed and suggest all to save and invest though may seem to be very negligible. I also ask my clients to have a basic term plan (Insurance product) along with a recurring deposit as they mostly turn good at the time of high inflation as well as offer good rate of interest. Let’s try to understand some key points about Financial Planning for Homemakers. The first stage will be to understand the need for financial planning.
The Need - It is one very important skill essential for all to learn and follow as ardently as possible. It facilitates creation of strong financial foundation. Your life goals i.e. buying a home, planning for children’s higher education or wedding or may be planning for future contingencies or retirement. Financial Planning covers a wide variety of monetary topics and complete understanding of financial planning lays the groundwork for solid financial foundation. For a homemaker it is important to understand concepts like house hold budgets, understanding expenditure patterns, debt payments, value of information especially about investment instruments, interest rates as well as taxation.
As a home maker it becomes imperative for both partners to understand the financial needs of the family and try to provision for the same moreover gradually share with your partner financial responsibility and discuss contingency plans as well as investment alternatives in great detail. Understanding the value of disciplined saving and continuous investments cannot be underestimated. Furthermore we have to remember how compounding rewards us and long-term investments at early age finally reap unimaginable rewards.
Banks and Instruments – Bank deposits are safe as they are insured. Banks offer different type of deposits depending upon the need of the customer as well provide several allied services. Moving towards instruments as a house maker I would prefer to build my capital by simply planning my tax liability (reducing tax liability). There are several Tax saving schemes available suiting to the specific household needs so are several investment avenues available coming from government as well as debt securities coming from reputed corporate houses moreover there are several bonds, fixed deposits plus debentures coming from government as well as corporate that could be adjudged based upon the product features along with suiting specific requirements of the household.
Moving towards higher risk appetite we have mutual funds and equity shares available but I will not openly advocate investing in these till the time investor has understanding, ability to do research (home work before making an investment) and time to follow these instruments closely as per market fluctuations. These instruments can facilitate higher returns but come along with higher associated risk.
Next in line are protection related products like Insurance i.e. Life insurance may be a simple vanilla term plan or endowment plan or pension fund or a Unit linked Insurance Policy. A health policy or a mediclaim in his age of higher and almost unaffordable healthcare cost is also valuable so better have a family cover mediclaim plan.
Caution – The homemakers must be cautious of taking loans especially personal loans or loans for consumption. They should read the terms carefully before accepting the debt as well as understanding the implications of changes expected in the interest rate. Housing loans, mortgages and use of reverse mortgage (loan against your house-property) could also be used for the advantage but cautious approach is recommended. Credit cards are also very important but has to be used judiciously otherwise credit card debt becomes a deathly hollow to emerge out of which becomes almost impossible and the cost of the debt is too high to be serviced by any household.
Avoiding Debt – In current scenario avoiding debt completely may not be possible so I propose some steps to avoid excessive debt. First is to set debt limits, second is to carefully for debt, do not give into temptations also make provisions for automatically money goes towards payment of your bills.
Comments about Gold – Gold is usually preferred in the jewellery form but that way a household stands a chance to lose the true value of the precious commodity. Investing in gold coins or bars is advantageous though managing physical commodity may become difficult. Suggested mode to enter into gold segment as an investor is to buy Gold ETF (Exchange Traded Funds)or some other funds that specifically make investment if gold. There are several schemes floating around in the investment market the only need is to take an educated decision.
Risks or hurdles in financial planning – In one of our recent program I talked about three fall-backs that any household could suffer if they are not cautious enough I also call the risks that loom large on any homemaker and these risks are as follow –
· Intuition
· Substitution
· Consumption
The above three are supposed to be guarded against and managed proactively. Shedding some light on these three first we can say intuition is the biggest reason for a risk or especially an investment turning to be a bad investment. Investment decisions are to be carefully taken and should not be taken based upon a hunch or my sixth sense said so or I had a very strong intuition about it so invested. The methodology is risky and you are putting your hard earned money on line so be are full and avoid making costly mistakes.
Second is substitution, do not dissolve your good investments just because they are cash rich or you though that I have earned enough as replicating them or substituting them may become difficult. In case you have a dire need and left with no options than touch your good investments as in most of the cases a novice investor or a retail investor ends up substituting a good investment with a bad one.
Last but most important of all consume but have pre-decided limits and plan to save for future gradually build some propensity to save do not be lured by temptation and concentrate on building capital as well as financial capacity. Key point to remember do not liquidated your investments for the purpose of consumption. Children’s education, healthcare needs or contingencies are the only good reasons to dilute your portfolio other than that all expenses are to be met with current income or other provisions. We need to remember the Intuition, poor substitution and consumption will kill the value and will lead to financial troubles in the future so beware of these three risks.
Conclusion – Financial literacy helps in building security and prepares for financial emergencies. People who are financially literate are reluctant to buy financial products that they do not understand and they believe in preserving value of money. The financial education does generate sense of accomplishment so do not be shy in asking question about financial problems or issues and become an intelligent investor.
Vivek Joshi
Director
Creative Head Consultants
