Q. I am 40, have a stable job and earn well. I have two children aged 8 and 6. I separated from my husband a year ago and received a settlement from the divorce. But I have limited knowledge of managing money. How should I plan and manage the finances for my children and for my retirement?
A personal financial plan will help you get the clarity you seek for managing your money to meet your goals like your children’s education and your retirement. This plan will also provide information on other critical aspects of personal finance like cashflow, insurance, tax, etc.
A comprehensive financial plan will help you:
Create a cashflow: Cash flow planning allows you to track your income and expenses. Categorise your expenses as critical or discretionary. This will help you to understand your spending patterns. Similarly, track your income and maintain a budget to know how much surplus income is available to invest to fund your goals.
Raise corpus for a rainy day: Your budget should provide for an emergency fund to help you cope with unforeseen financial challenges. This fund should ideally take care of your recurring expenses for 3 to 6 months.
Buy insurance, ensure health: Today, annual medical inflation in India is at a high of 12%. It is important that you purchase a health insurance policy for yourself and your children. Also, create a corpus for those medical expenses not covered by insurance.
Set goals: Setting goals is an important step in the financial planning exercise. Define your goals as clearly as possible. The goals must be SMART—specific, measurable, achievable, relevant, and time-bound. A well-defined goal acts like a clear target for you to achieve, through a structured and disciplined investment plan. It helps you stay focused on what you want to achieve and provides a framework for measuring your progress. Prioritising your goals and segregating them into short- and long-term horizons will help you choose the right investment tools.
Plan your investments: A well-defined investment plan is a function of your requirements, and your capacity to invest. Your goals are an indicator of how much you need to invest while your cash flow will indicate how much you can invest today toward your goals. Another important component to consider while setting up an investment plan is your risk tolerance.
Plan for retirement: Various products are available to help you plan for retirement while also giving you tax benefits. For example, the employees’ provident fund (EPF) and the national pension scheme (NPS) can yield good returns and fetch tax benefits under section 80C.
Manage risks: You would want your children to maintain their current standard of living in case something were to happen to you. In such situations, life insurance provides financial protection to dependants. Determine the quantum of life insurance required based on your current expenses that must continue, critical goals like your children’s education, and your liabilities, which you would not like to pass on to your family members. Apart from life insurance, other insurances that must be considered are health and critical illness.
Drafting a personal financial plan can be a complex exercise and hence, it's always advisable to seek an expert’s advice. You may approach an experienced financial advisor who will help you through the process of drafting your financial plan and also support you in its execution.
With dedication and continuous monitoring, your financial plan will help you achieve your goals.
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