Your Questions Answered: Financial planning, asset allocation and differences between savings and investments

Q1. We are newly married. We save regularly. Now, we have been advised to invest. What is the difference between savings and investments?

Saving is the process of putting cash aside and depositing it in safe and liquid accounts, very commonly in savings accounts with a bank or the post office. What you save is usually the surplus income after meeting all your expenditure. The savings account yields a small interest. You can easily withdraw money whenever you need to meet some immediate need.

Investing is the act of moving money out of savings into financial or non-financial products with the expectation of earning higher returns over a period. The financial products could include shares, mutual funds, etc. while non-financial products could be land, gold, etc.

Let us understand the main differences between savings and investments.

Everyone starts with savings, which is the first step to making investments according to a careful plan. Now, that you have started a new life together you will want to sit together and understand your individual and joint goals. Take the help of a qualified financial planner to make the right investments to help you reach those goals.

Q2. I am new to investing. What is asset allocation? What should be my ideal asset allocation?

Asset allocation balances risk and return by investing in various asset classes like stocks, bonds, gold, etc. within a portfolio. The ideal asset allocation will be different for every individual, depending on multiple factors.

1. What is your investment objective? For example, do you want to save for your child’s education? Or do you want to buy a house? Or you just want to build wealth for long term?
2. What is your investment horizon? How long are you willing to stay invested?
3. What is your risk appetite? How much risk are you willing and able to take?

Once you have the answers to these questions, you can arrive at the asset allocation that is right for you. A judicious allocation can reduce your risk and maximize your returns. Please remember that there are many factors to consider before you decide the right allocation. It is advisable to seek the help of a finance professional who has the training and experience to understand you as well as the vagaries of the world of finance.

Q3. What is financial planning? How can it help me?

Financial planning is the process of taking a comprehensive look at your financial situation and building a specific financial plan to reach your goals. It delves into multiple areas starting with you, your goals, investment avenues, taxes, insurance, time to retirement, your estate and more.

Many people feel they do not need to engage in financial planning. They earn more than they spend, are always able to pay their bills, and have enough in the bank to cover their basic household expenses. Their lives are comfortable. What can possibly go wrong?

Unfortunately, many things can and do go wrong. Life is unpredictable. How do you deal with an economic downturn? What if you suddenly lose your job? What if a pandemic forces you to shut down your business? What if there is a crippling health issue or an accident? What if someone you counted on for financial support suddenly backs out?

Financial planning can’t prevent the unpredictable. However, it can, to a large extent, prevent those from turning into utter financial disasters. A well-thought-out plan can provide help and a sense of security when you need both most.

A potential calamity is not the only reason why you should consider financial planning. It offers you a practical strategy for making sound economic decisions in all areas of your life. When you create a well-designed financial strategy with the help of a professional and adhere to it diligently, you have the best possible chance of success in achieving your life’s goals and ensuring the long-term wellbeing of your family.

Q4. I have a child with special needs. He is dependent on others for support for many things. How can I chalk out a financial plan to ensure his interest is always protected even after me?

Taking care of a special needs child can be challenging both emotionally and financially. However, with a planned approach you can deal with both efficiently. The solutions can be worked out legally and financially.

1. Place of residence

Where will he stay? Will he continue to stay in his own home? Or will he move to a residential facility that can support him? If he continues to live at home even after you are no more, how will he get support for his everyday needs? The answers will determine the right legal framework to help you. You could choose to build a trust fund as well.

2. Guardian

Both parents are natural guardians as long as a child is a minor. Once he turns 18 and becomes an adult there is no need for guardianship. But, in your son’s case, when support will have to continue even in adulthood, you will want to specify a legal guardian. Please consider some important questions when you choose a person whom you trust to take care of your son after you are no more. Does the potential legal guardian:

• Have the ability and willingness to manage your son’s personal as well as financial affairs?
• Have the capability to make adjustments to one’s own commitments and lifestyle?
• Expect reimbursed for any expenses incurred on behalf of your son?

We can appoint a legal guardian even when a natural guardian is alive or incompetent. We will suggest you create a Trust, when you initially set up the trust, you will likely be both the Grantor (trust creator) and Trustee (the person responsible for managing the trust), and your child with special needs is the trust’s beneficiary.

You’ll then name the person you want responsible for administering the trust’s funds upon your death or incapacity as the Successor Trustee. To avoid conflicts of interest, overburdening the legal guardian with too much responsibility, and providing a system of checks and balances, it may be a wise decision to name someone other than your child’s legal guardian as a Trustee.

As the parent, you serve as the trustee until you die or become incapacitated, at which time the Successor Trustee takes over. Each person who serves as Trustee is legally required to follow the trust’s terms and use its funds and property for the benefit of your special needs child.

Additionally, you should name multiple Successor Trustees—which can even be a trust company, bank, or another professional fiduciary—as backups in case something happens to prevent the individual you’ve named as primary Trustee from serving.

3. Will

Prepare a will to ensure your son gets the benefit of your legacy without any hassle. The will can make your wish clear about several issues.

• Who will be the legal guardian for your son?
• What will be that guardian’s rights and responsibilities?
• Will you create a trust to look after your son? How and when?
• Who will be the trustees?
• How will funds be transferred to this trust?
• How are the trust’s assets to be used after your son’s lifetime?

4. Trust

It would be better, to form a trust now itself, instead of through a will. When you form a trust, you don’t have to depend on an individual. Friends, relatives, or even professionals can be appointed as trustees. The trust can be structured as per your son’s specific requirements. A new trustee can be appointed in place of an outgoing one. The trust can be empowered to handle your son’s affairs through his lifetime.

5. Letter of intent

A letter of intent is not a legal document but can be an important guiding resource for people involved in your son’s care after you. This letter describes the family history and all details about the child’s life (daily routine, medical history, likes, dislikes, dos and don’ts, contact details of important people like doctors, financial planners and estate planners and so on). It also describes the parents’ vision as to how a child is to be treated in any situation. 

Essentially, this letter becomes a comprehensive guide to those who will fill the natural parent’s shoes. The copies of this letter should be shared with people like the guardian, trustees, relatives, and others who are likely to be involved with the son in any manner.

6. Other aspects

• Ensure every financial asset has a valid nomination.
• Who will take care of the parents when they reach their old age while continuing to take care of the son?

International Money Matters Pvt Ltd is a SEBI registered investment advisory firm. If you have any personal finance queries, click here to talk to advisors from IMMPL.

Note: This story is for informational purposes. Please speak to a financial advisor for detailed solutions to your questions.