Diligent saving + SMART investing = A lifetime of security

Financial planning around life goals is a necessary step for women to be more financially independent and secure

Women tend to play multi-dimensional roles in society. Apart from typically being the mainstay of the family unit – as daughter, life-partner, sister, mother – women are an integral part of the economy. A government survey shows that number of working women is on the rise and has touched 37% of the workforcec.

While financial literacy in India falls short of the level in the developed world , women can buck this trend by building a greater understanding of finances and money management. This critical life knowledge will help women become more active stakeholders in matters of money and financial security – for herself or for her family.

Financial literacy entails a basic knowledge of financial planning, which includes incomes and expenses, along with a working understanding of assets and liabilities, savings, investments, and wealth management. The more one familiarises oneself with the basics of finance, the better we are equipped to manage the financial impacts of life events, and thus ensure our financial security.  

Here are some insights from Aditya Birla Capital’s podcast ‘For Her’.

Fundamentals of financial planning

A financial plan is a well-documented record and roadmap of one’s financial health. You can either put together one yourself, or you can seek the help of a professional. 
 

There are three key components to a financial plan – assets, liabilities and emergencies/planned events. Experts  recommend the 50-30-20 model to maintain an optimum balance between the components of a financial plan.

• 50% of your income is allocated towards all routine outgoings, including rent, household expenses, loan repayments, children’s fees, etc.
• 20% of the income is towards leisure and lifestyle expenses, including holidays, shopping, etc.
• 30% of the income is earmarked for savings to ensure short-term as well as long-term financial security. 

Think about a corpus: The savings also take into account any emergency or planned life events like marriage and children’s education, besides creating a corpus for comfortable retirement. You need to be mindful where you are investing – be it private stock investing, mutual funds, real estate or fixed deposits – to eventually build a solid portfolio.      
 

Plan for your lifestyle: You should optimise the financial plan based on different stages of your life; it should support your life and enable you to live the life that you want to live. While leisure and travelling can be a priority early in life, there could be other responsibilities like marriage, children, etc.  
You need to think ahead about your future and plan suitably. Be it expected factors like career progression, or unexpected events like separation or an accident, a good financial plan will help keep you on a secure financial footing.      
 

Age and inflation: It is important to factor in the increasing life expectancy as well as inflation when you are drawing your financial plan. Identify your short term and long-term goals, take stock of current status and make a plan to relocate the cash-flow accordingly. An emergency fund is a strong safeguard that can help you tide over an unforeseen life-event without disturbing your long-term savings. The thumb-rule is to have six months expenses which can be accessed at a short notice.   
 

Pro tip: The financial plan should be SMART – Specific, Measurable, Attainable, Relevant and Timely.      

Planning for milestone life-events    

Marriage: When planning  a wedding or discussing life post-marriage, it’s important for the couple to be on the same page with regard to finances, in terms of short-term and long-term goals, and how you plan to get there together. Factor in that the legal and tax status also changes after marriage.

Talk about money with your partner early on in the relationship, to set the tone for the future. It’s also important that both partners know each other’s financial situation – funds, assets, loans, credit cards outstanding, etc. – and discuss how to handle the finances in a transparent manner. Having the money conversation upfront is better than not having a good understanding.

There is no right or wrong when it comes to having separate accounts – the important thing is to mutually decide who will pay how much for what. Keep an account and credit card in your name to maintain your own credit history and credit score.

Motherhood: If a woman has to take a long break from work to be with her baby, there are financial implications for the family. Going from a double income to a single income, while expenses remain the same or even rise, can be a challenge and there needs to be proper planning.

The  list of things to do before the baby arrives is lengthy. Do avoid taking on credit card debt; for instance, avoid using credit cards to pay dues. Credit card interests are always higher and ideally dues should be paid off as soon as possible. Do plan for potential pre- and post-baby expenses.

Working women need to understand their organisation’s maternity and child-support policies so as to leverage all possible benefits and get maximum support.

Parenting: As children grow, so do the financial responsibilities associated with their upbringing. From providing for school education and academic opportunities to extra-curricular activities, a good financial plan can go a long way in fulfilment of the parental commitments. It could also take into account college expenses or the costs of opting for an international college degree, which can put significant pressure on the finances of the family.

Parental Responsibilities: An important life event for women is caring for aging parents, relatives or in-laws . To cope with this involves thorough budgeting for medical care, over and above normal expenses. The more thoroughly you plan, the better you are equipped to meet challenges. Do have a frank discussion with your aging parents or in-laws about their financial resources and plan eventualities while they are still active. 

Retirement: When working life ends, so does the income. Retirement often feels far in the future and it’s a common mistake to not maximise your retirement contribution.

However, when it comes to retirement, time is also your best asset. The earlier you invest towards your retirement, the more time you have to take the benefit of the power of compounding, which adds interest on interest and adds up continuously over time.

Experts suggest that you should set aside at least 15% of your annual earnings for retirement. If the budget doesn’t permit, start with 5% and gradually raise it to your desired amount.      

Thinking ahead

With expenses lined up at every stage of your life, the challenge often is to protect your capital from yourself and live within the budget. One way to prevent overextending is to automate savings and investment plans. Save for short-term and long-term financial goals separately. Another important tip is to not lock your savings in conservative avenues like cash or bank FDs. These offer returns that are lower than inflation rates, leave alone yielding growth in the long-term . To beat inflation, women should explore investments that offer higher returns.

Apart from these insights from Aditya Birla Capital, women can ensure financial security by talking to trusted financial advisors to plan for financial independence. Keeping with its purpose to enrich lives responsibly and be a force for good, Aditya Birla Group recognises that financial inclusivity is essential for both women’s advancement and India’s social development.