Q1. How do I initiate money talks with my family? And how often do you suggest I should speak to them about money?
It is difficult for many of us to speak to our families about money, mainly because of the attached emotions. We do not want to trouble our dear ones with money matters. But it is very important to talk to your family regarding money, investments, and obligations. In fact, we may invite negative consequences if we don’t. We may leave them unable to cope with sudden, unforeseen circumstances.
Here are some of the tips on how to talk about money with your family.
Schedule a meeting: Instead of abruptly starting a conversation, schedule a meeting with a specific money agenda. Once you start, have a meeting as often as needed.
Start small: Start by talking about regular expenses, savings, etc. Take one step at a time. Don’t jump into discussions on investments, will, etc. Keep the scope of the discussion limited during the first few conversations. For example, you can talk about how you plan to fund the purchase of a property in the future. Or about your plans to meet medical expenses.
Control your emotions: It may seem difficult at first, but you need to control your emotions while talking about money. After all, you are trying to protect your family and ensure their well-being. You must tell them about your existing investments, financial plan (if done), obligations, etc.
Provide complete information: While you discuss the finances, do not leave out any important information including details of the financial advisor, insurance policies, will, etc.
While having these discussions, if you find it difficult to talk about or explain certain points, take the help of your financial advisor. Sometimes it is better to involve a neutral third party, who is not emotionally attached to your finances.
Q2. We are newly married and are trying to set up a budget for monthly expenses. What do we need to include in the budget?
A budget is a plan for your household income and expenses over a certain period. Usually, household budgets are monthly, while certain big expenses are budgeted yearly. A budget helps you in wealth creation for yourself and your family.
Budgeting is considered the first important step in your financial journey. While some may think budgeting takes away freedom, the truth is budgeting provides you with greater financial freedom.
Collect the figures
Budgeting starts with an estimation of where you stand currently in terms of finances. First, make a note of your income—from profession or employment, interest income, rental income, income from investments, etc. Then, look at your savings and investments, including bank balance, fixed deposits, stocks, mutual funds, PMS, real estate, gold, etc.
The next step is to look at the debts or obligations. What is your credit card outstanding? What about loans? If you are paying an equated monthly instalment (EMI) to settle your loans, know the interest and principal components of the EMI.
Similarly, take into account your recurring monthly expenses—electricity, internet and phone, rent, maintenance, salaries of help (servant, driver, cook), etc. Add on your grocery, fuel, eat-outs, clothing, entertainment and the like.
The other important outgoes to be included are premia on various insurance policies, instalments of systematic investment plans (SIP), and other regular investments as in the national pension system (NPS).
Do not forget to estimate the income tax you may need to pay while budgeting.
The figures you have arrived at will give you a clear idea of your earnings, your spending and your savings. Now let’s move on to preparing your budget.
Prepare the budget
- One budgeting option is to use the 50-30-20 proportion to divide your total income.
- Allocate 50% towards your “needs” (groceries, rent, EMIs, basic utilities, fuel, childcare (if any), health care, etc.)
- Set aside 30% for your “wants” (travel, eating out, entertainment, gifts, etc.)
- Save the last 20% (bank account, SIPs, retirement fund, NPS, etc.)
- Creating a budget requires healthy teamwork. Also, budgets must be reviewed regularly.
- Your budget should be flexible enough to accommodate your dreams and goals. Do not over budget. Do not make it too stringent. After all, YOLO—you only live once!
Q3. We are a young couple in our early 30s. Our advisor says we should opt for financial planning. However, both of us feel that planning is for older people–those who are in their 50s or have retired. What do you suggest?
As Venita VanCaspel, the well-known American financial planner and author says, “Financial planning is like navigation. If you know where you are and where you want to go, navigation is not such a great problem. It is when you do not know the two points that it is difficult.”
Financial planning helps you manage your money in such a way that you can achieve your financial goals. It ensures that you have the right amount of money, at the right time when you need it.
It is important to start planning at an early age. In later years, this will help reduce your burden to accumulate wealth for your retirement or late-life goals. Starting early can help you go a long way thanks to the power of compounding. While you earn, your existing investments will also be earning for you resulting in an exponential growth.
Take an example. Both Ms A, age 30, and Mr B, age 50, want to accumulate 2 crores by the time they turn 60. Considering a return of 10%, how much will each need to invest in a systematic investment plan (SIP)? A will need to invest ₹ 9,700 every month for 30 years, while B will have to invest ₹ 1,00,100 every month for 10 years. A can enjoy a 10-fold advantage in SIP thanks to the power of compounding.
Advantages of financial planning
Gives direction to goals, and dreams: Financial planning helps you better understand your goals and dreams, and the ways to achieve those. You get a better idea of what you need to do to achieve those goals.
Discipline in investments: Financial planning inculcates a healthy savings habit and helps you to be disciplined with your investments. You learn to keep a tab on your spendings. When you invest, you stay invested.
Better savings: When you have a financial plan in place, you get a better insight into your incomes and expenses. This will help you cut down unnecessary expenses and save more.
Better preparedness for emergencies: An emergency fund should be an important part of your financial plan. When this fund is in place, you do not have to worry about how to manage any emergency or contingency.
Insurance: Financial planning helps you ensure that you have adequate life cover as well as health insurance. In turn, this will help secure the future of your family even in your absence. Should medical issues arise, you will not need to liquidate your investments.
Retirement planning: A good financial plan helps you have a better retirement plan in place. This will help you to maintain your lifestyle even after you retire.
Wealth creation: Good financial planning helps you prepare better to beat inflation and create wealth to fulfil your dreams and goals. Not just yours, even your family’s. A thoughtfully prepared plan helps you to prudently invest your savings in the correct product mix, so that you are able to achieve your short, medium and long-term goals.
A goal without a plan is just a wish. So, it is very important to start planning at an early stage. Go ahead, consult your advisor, and get your financial plan in place.
Q4. What are the questions that I need to ask my financial planner and advisor?
There are certain questions that you need to ask your financial planner and advisor to determine if:
1. the advisor is the right fit for you and understands you, and
2. The plan the advisor is suggesting will help you achieve your goals and targets.
Are my goals and dreams realistic?
If your goals are unrealistic, you will not be able to achieve those. Or, even if your goals are achievable, unless your financial planning is done well, you will not be able to get to those. Will the investment strategies your advisor is recommending help you reach your goals?
Am I prepared for emergencies?
Do you have enough funds to care for you and your family if something goes wrong? Are you prepared for situations like the pandemic?
Am I adequately insured?
Should something happen to you, is your family protected? Your financial advisor should give you an idea if you are adequately insured after considering all your expenses and obligations. Your family should be able to meet all obligations and live well even in your absence.
Are my investments on the right track?
Do you have the right products in your portfolio? Is the product-mix right? Financial planning should also ensure that you have the right asset allocation—no unnecessary risks, nothing too conservative either. Both may jeopardise your chance of meeting your goals.
Are my investments good to cover my goals across time?
Your investments should be done in a way to help you cover your goals at different stages in life. Right asset allocation in prudent investment avenues will ensure you achieve your
short, medium and long-term goals, with minimum tax implications.
Is my budget well-structured?
Your financial plan should give you the freedom to live your life. In other words, you should not be under-budgeted or over-budgeted.
Will I be able to retire when I want?
Your advisor should be able to tell you if you are financially equipped to retire when you want. Your investments should ensure that you are able to maintain your lifestyle and do what you wish to do, even after retirement.
Can my financial planning accommodate my lifestyle changes and transitions?
If there were to be any change in your lifestyle or you underwent a life-altering situation, will your plan be able to accommodate these changes? Your plan should not be so rigid that it cannot adjust to the changes in your life.
Anything I have missed out?
This is a question your advisor should be able to answer keeping in mind your goals and your financial state. Many times, one tends to miss certain aspects, despite careful planning. Your financial advisor should be able to point out any such crucial point that you must include in your financial planning.
These questions will help you get a better idea about your financial advisor and your financial plan. It is important that your advisor and you are on the same page. Your financial planning must move in the right direction and give you the confidence that, yes, you will be able to achieve your goals, your dreams, your aspirations.
Note: This story is for informational purposes. Please speak to a financial advisor for detailed solutions to your questions.
International Money Matters Pvt Ltd is a SEBI registered personal finance firm.