Publication: The Times Of India Mumbai; Date: Nov 25, 2008; Section: Your Money; Page: 23
MEET THE FAMILY Akshay Mathur is a corporate executive and a single parent in his late thirties. His wife, Shalini, died a few years ago. Their two 10-year-old daughters, Kirti and Poorti, are in class five. Despite a substantial income, Akshay has but a tiny surplus.
Playing dad and mom to twin girls, and earning for the family, leaves little time for financial planning. But that’s what single parents must be especially careful about.
Most of us constantly race against time, but it’s especially true of single parents like Akshay Mathur, a corporate executive in his late thirties. Akshay is raising his daughters, 10-year-old Kirti and Poorti, alone, since his wife Shalini died in an accident a few years ago.
He’s constantly juggling his kids’ schedules, career, and socialising. And what has suffered most, given the chronic lack of time, is Akshay’s health and finances. But these are precisely the things that need extreme care in a situation like his. A single parent has great responsibilities, and errors or neglect can lead to dire consequences, as Akshay understood well.
Akshay wanted to provide Rs 1 lakh a year for each daughter’s education, until they turn 18. He also wanted to ensure that each had Rs 25 lakh for her higher education, and Rs 50 lakh for marriage. He wants a retirement income of Rs 2 lakh a month by age 55. He wants to ensure he has appropriate and adequate insurance. Akshay was aware that estate planning was necessary to safeguard his daughters.
Cash flow and net worth
Akshay earned Rs 52 lakh a year as salary. His cash outflow was Rs 51 lakh—Rs 15 lakh as taxes, Rs 12 lakh for lifestyle expenses, another Rs 12 lakh for home and car payments, Rs 7 lakh in insurance premiums, Rs 5 lakh for vacations and entertainment. That left an annual surplus of Rs 1 lakh.
Akshay’s net worth on September 1, 2008, was Rs 1.82 crore—Rs 3 lakh in savings and deposits, and an equal amount in the Public Provident Fund. His life insurance cover came from Rs 36 lakh in unit-linked insurance plans. He had Rs 10 lakh in stocks, and another Rs 10 lakh in mutual funds. His lifestyle assets (home and car) were worth Rs 2 crore. His liabilities were Rs 80 lakh.
On reviewing Akshay’s goals, cash flow, and net worth, we observed that his savings were mostly in ULIPs, EPF and PPF contributions, and some stocks. Considering his income—and Shalini’s, too, when she was alive—was good, they had few assets. Most earnings had gone towards a down payment and hefty loan instalments.
Although the Mathurs were no longer a double-income family, loan payments were still manageable. But insurance premiums took up almost 52% of Akshay’s net income. Despite whopping premiums, Akshay was insured for a mere Rs 35 lakh. Besides, there was a Rs 14 lakh cover for his daughters, while Akshay’s liabilities remained uncovered. It’s crucial for a single parent to be well insured against death, critical illness, and disability. Akshay was low on contingency funds. His debt exposure was limited to PPF and EPF. He was in the process of taking another loan to buy real estate.
The top priority was to ensure adequate medical cover for the family, and more life insurance for Akshay. We surrendered two old policies and shored up the contingency fund. We parked a chunk of the reserves in deposits and fixed maturity plans. Akshay junked his idea of buying a house and used the liquidity to pay off his car loan. He started investing regularly in PPF, and made voluntary EPF contributions. He also agreed to invest in gilt funds.
Next was a thorough estate planning exercise—making a will, identifying a guardian, and setting up a trust. Akshay resolved to save at least 30% of his income every month, and to increase his portfolio’s diversity. We decided to review the plan every six months. Akshay decided to seek good domestic help to care for the girls, so he would have more time to care for his own health.
HOMEWORK FOR PARENTS
Choose a legal guardian for your child, and register a will Ensure you have sufficient life insurance to cover all liabilities, and to secure financial goals like education, marriage and day-to-day living expenses for your child Collate information about all investments and about where important documents are kept. Make this information available to your partner or your child’s guardian Build a contingency fund, and plan an alternate income stream, in case some unfortunate incident ends your primary income Make your child financially literate. Do not shelter her or him from the need to manage money Do make time for health, social and money issues. If your workplace permits a flexible schedule, take advantage of it
Amar Pandit is a Certified Financial Planner and Director, My Financial Advisor
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