Being prepared for what life throws at you.
By Sudha Hariharan
Money matters, so whether you are single or married, a career woman or homemaker, you need to take charge of your financial affairs. Managing your money wisely is a prerequisite for financial comfort. The principles of investment planning – starting early, having a long-term plan and investing regularly are the same for men and women. So, why do women have special investment needs?
If you study the life patterns of women, you will see that:
Women tend to live longer than men.
Their careers are interrupted by family needs.
More often than not, women prefer a conservative investment strategy.
Vibha Padalkar (executive director and chief financial officer, HDFC Life) shares her views on the importance of financial planning for women.
“In the first case,” she said, “the woman was single (by choice), successful in her career that offered her a spacious flat in Altamount Road, Mumbai. She lived it up, but now that she is just five years away from retirement, the realisation has started sinking in that her savings are woefully inadequate to buy her the kind of apartment in Mumbai or lifestyle that she is used to.
In the second case, while she was happily married (for some time), she used to spend her salary on household expenses while the husband made all investment decisions. When the relationship soured, she realised to her dismay that she had precious little in her name to fall back on.
In the third case, a homemaker lost her husband prematurely in a road accident and she was clueless about what their savings were, whether insurance coverage was taken and so on.”
In all the above cases, while they do not have much control over their personal pain, at least comfort could have been derived with better financial planning.
Today, urban women are strong economic contributors to society. They increasingly choose to set up small to medium-scale businesses or co-operative self-help groups, all contributing to their family’s income and to the nation’s GDP. It is true that today’s urban woman is sophisticated and understands the importance of being financially self-reliant, yet many are reluctant to be involved in financial planning.
According to a survey conducted among urban women in 11 Indian tier-1 and tier-2 cities during late 2011 and early 2012, Indian urban women have a long way to go when it comes to goal-based financial planning. Given her poor financial awareness levels, she is unable to use her financial know-how to review and realign her needs and arrive at a comprehensive plan, which can cover all her short and long-term financial goals.
The classification of Indian cities (tiers 1, 2, 3) comprises a ranking system used by the government to allocate house rent allowance (HRA) to public servants employed in different cities; HRA is also used by the Indian Revenue Service (IRS) to provide income tax exemptions. Cities are classified on HRA and on the basis of their population, as recommended by the Sixth Central Pay Commission in 2008 and Reserve Bank of India respectively
The survey further revealed that only 22 per cent of urban women have a comprehensive financial plan to cover all short and long-term goals while 42 per cent of them have only a basic plan.
Are women’s financial needs different?
Yes, women face a number of unique risks, stemming both physically as well as from the social structure – longevity, gender-related illness, care-giving responsibilities, ageing single, greater healthcare costs, etc.
Pregnancy brings its own joys as well as additional financial responsibilities. Most women opt out of their careers, or settle down for lower-paying jobs to balance career and demands of motherhood. Many face complications, which leave them emotionally and financially drained. As mothers, they often take prolonged leave of absence from jobs to care for kids or ageing parents, which deplete their income source and the savings gap may take years to recover.
The genetic and biological make-up also makes women vulnerable to medical and health situations that are unique. Women bear higher risk of cervical and breast cancer. These silent killers are known to target at least one in 10 women as per reports. Medical advancement has made these illnesses less severe, but the financial drain of fighting these diseases is sufficient to wipe out the lifetime savings of an entire family. It is, therefore, advisable that women pay attention to health and plan proactively to build a fund that can aid in such situations.
With evolving demographics and social changes, women can be single through widowhood, divorce or choosing never to get married.They are, therefore, more likely to be solely responsible for their financial independence at some point in their lives.
Though saving systematically comes naturally to women and enabling them to stick to a disciplined approach towards investing, studies show that most of women do not start saving early. Building an asset and aiming to be self-reliant, sufficient to last these possibilities, requires right financial planning.
Key basic financial steps
As women, we need to understand our financial situation and learn more about money. We need to do more than just balance our bank accounts and pay the bills. We must understand that as woman, we have different financial needs than men and must start our financial planning as early as we get started with our first job or venture. Things that we need to do so that we have a better control on our finances are:
Learn about money; we can control it if we know about it. Hence, the first thing we should do is know how to earn it, save it, multiply it via investments, protect it and then pass it to the next generation.
We should make projections of our income stream and the anticipated expenses in the short and longer term.
Understand our risk profile and invest accordingly.
Start to plan for our retirement as early as our first job / venture to fully benefit from the power of compounding.
Learn how to keep away from investing in products that one is unable to understand
Know our financial situation all the time and take charge of it. And after marriage, we would need to share in managing the family’s finances.
Several decisions we make as women would have a financial planning component to it. Hence, we should avoid being stranded when faced with a difficult situation.
Steps to right financial planning
Step 1: Defining the objective
Women should clearly set a realistic financial objective, which could be the purchase of home, building a kitty for post retirement income, starting a business, overseas travel, buying a car, creation of a fund for the child’s marriage and education, etc. Defining the amount of money and the time horizon for accomplishing the objective is the second important factor, as it determines the choice of investment instruments and impacts on the accomplishment of the objective.
Step 2: Preparing a plan
A financial plan starts with taking stock of one’s assets and liabilities and projecting future expenses and income. This gives a fair idea of what amount is required to meet various current and future financial objectives. Various factors such as time horizons, risk appetite, and type of investment avenues available are also considered. It is important to build some form of a contingency plan, so that savings can continue even in case of unforeseen circumstances like illness, death of spouse or loss of job.
Step 3: Starting to invest
Disciplined investment is the key to success of a financial plan. Today, investing online is gaining popularity. Also, most financial advisors help with documentation. However, it is important to read and understand the nature and associated risk of each investment instrument before investing.
Step 4: Reviewing a plan periodically
Once investment starts, to ensure that you stay on course, it is advisable to periodically review them in line with increased income or expense, new assets or liability acquisitions or changing market conditions. For example, a plan should be reviewed to judge the performance of various investments. When stock markets change course over a period of time they may disturb your asset allocation. So, you may have to redeem some of your equity investments or buy more of them, depending on how much risk you are willing to take.
As you approach a particular milestone (say, your child’s college admission or marriage), you would need to exit out of equity investments and move to debt in order to protect your accumulated funds.
Step 5: Redeeming investments
As the milestone you have been saving for approaches, you would need to redeem your investments. In case of a life insurance policy, it involves submitting your policy documents to the life insurer and follow up for the maturity proceeds. You may also need to sit down with your financial consultant and understand the taxation issues involved on redemption of your investments.
It is equally critical for us to invest time to educate ourselves about the different investment vehicles available along with the different life- stage events for right approach to financial planning.
Women should cultivate the habit of reading different personal finance columns, and related publications to brush up knowledge on finance. We must know what exactly we are investing in. We should not blindly follow others’ advice. Only an informed mind can take the right decision.
After all, you must carve out and decide your own financial future.
Needs Investment / Financial Tax savings
Instruments Equity, MFs, Life insurance Insurance plans,
ULIPs, traditional plans and ELSS, PPF, MFs,
insurance plans, health tax savings
pension plans, insurance bonds, etc