Personal finance for women

Introduction

F.I.R.E (Financial Independence Retire Early), investment, insurance, real estate, retirement and a myriad of personal financial management (PFM) terms are mostly addressing male readers providing examples, calculators, and clear specific advice. A decade ago, admittedly late in my life, when I started reading and learning about PFM, I found little to nothing in the Indian context that specifically addressed women, especially single women. Most of the material for women were assuming they have a secondary role tackling home budgets and health than personal finance. Girls, growing up, are mostly told that the “man” would take care of them and it is the “man” who needs to get the bread to the table. So, I find a lot of the women I work with, many who have more than a decade or two of industry experience, have “left” all their financial aspects to the “man” in their life. Well! Good for them and I am not getting into the debate on whether this is right or wrong, my intention to write this is for those women who “want to” or “have to” design their own financial destiny. A lot of what I am writing in the subsequent sections are my personal learning, mistakes made, and avoided. I am sure there would be many better ideas and approaches that are from the reader’s experience and exposure to the financial world and specific to the cultural nuances that surround. Happy to hear your comments.

STEP ONE: Get a clear grip of YOUR current financial situation

The first action is to write down (or enter into excel) all your bank accounts (SB/ FD/ RD), PPF, EPFO, Annuities, mutual funds, insurance details, real estate details, stocks, gold and other precious belongings, paintings and yachts too; everything should be written down with as much detail as you have on hand. I use an excel workbook with individual tabs for each type of asset and an overarching goals sheet to link the assets to their purpose. More on this goals’ sheet later in another article. Another key information to put into writing is all the liabilities, loans for education, home, car, personal and include loans taken from family members as those also have repayment dates though may not be firm.

Next are insurance details, Life and Health, home, and motor(vehicle) all that apply to you. Life and health are the most important and mandatory I would say. An area I am yet to get my arms around unfortunately and have a deadline to close it in 2021.

A very important task is to get a grip on monthly and annual expenses, including clearly marked for SIPs and EMI’s. It took me the better part of 3 years to become meticulous in recording my expenses and reconciling them with income and savings/investment. This exercise builds an immense level of confidence in what you are tackling from a financial aspect and builds both a narrow and a large picture of your cash flows during the year. Trust me, the first year, when you do an audit post completing 12 months will be a real shocker and you will be rudely awakened to how “tiny” expenses that are insignificant individually can combine to become a significant expense head. You may take a deeper look into your lifestyle and even your footprint on the earth and contribute to the ESG wave.

Being a woman does not mean that you do not have dependents (could be financial/emotional/ physical) and that means that makes an impact on your picture. If you do have one, please repeat the above exercise for the dependents too. For example, assume your mother is financially independent but is depending on you to tackle the day-to-day and the long-term management of her funds. It is a serious responsibility and will need a different mindset from handling risk to ensure that the needs are met comfortably. This is a very critical activity that has to be done and improved upon year on year, I say improved because as you learn more, you will find yourself making changes every year to this broad map.

STEP TWO: Define goals

As humans, we need a goal if we need to stay disciplined to achieve something. Goals are very personal and highly dependent on the financial scenario that would have been documented clearly on completing step one. Another facet is goals should have priorities just like Maslow’s hierarchy of needs, the clarity of the goal and whether it is immutable or not is very important while you define it. Some common goals you will keep reading about are retirement, children’s education, foreign vacation, marriage, buying property or vehicles, emergency fund, and so on. Timing of the goals is the next point as not all goals have to be met on the same day or right away. Some may be more than decades out in the future. Write your goals down with a clear description of what it means to you, lock in where it stands on the priorities meter (must-have, high, can live without could be graded on your meter), and by when do you need it. Do some reading or speak to some people who are tackling these goals to get a view of the financial cost of the goal in today’s terms. E.g. you want to buy your first car and a friend just bought the very car you like; you can make a note of the market price on the road in your goals sheet.

Another important aspect is “dependencies” on your goals for others. A common example is the higher education of children. There is no way to determine if your 2-year-old wants to be a painter or a paleontologist. Inflation on education the world over has been high but in India, it is unpredictable and high together. At the time of writing this, the NEET counseling for MBBS is concluding around the country and the newspaper has articles on steep fee hikes as high as 25%-30% for the year. So, your plan must be flexible for more than one parameter: your child’s interest and the whims of the unknown controllers of education.

STEP THREE: Calculate targets

Time value of money, inflation, compounding are all very real terms and concepts that are worth a read before you sit down to do your calculations for the selected goals. With the pandemic washing across the world, there is a clear understanding that emergency funds are very important.

So, the first target to try and achieve is the emergency fund. Now based on the definition of emergency for an individual, there may be more than one emergency fund needed. E.g. Monthly expenses for half a year are often suggested by many experts for an emergency fund, yes which would be useful if you get a pink slip. Now, does that cover your SIP’s and EMI’s, or would it cover medical expenses if you have a parent over 85 years whom any health insurer will not cover? So split your emergency funds for the different heads and set targets for the same like have a 5 lac available in a low-risk investment product for every dependent adult without health insurance and try and make this a must-have goal with a short runway to achieve. This figure is arbitrary, and you may ask why not 10 lakhs, my only answer to that would be more the better if you can afford to set it aside and can add it onto every year to cover for inflation.

Long-term goals have a love triangle with inflation and compounding. Calculate long-term targets for retirement or any goal a decade or more away very carefully considering these aspects.

STEP FOUR: Allocation

Categories of assets can be Equity (Direct and Mutual Funds), Fixed Income (EPF, NPS, PPF, FD, Debt Funds, Gilt funds), Real Estate, and Gold. Each of these has its own characteristics concerning risks, lock-in, returns guaranteed or not, tax, liquidity among other things.

Allocation is a very confusing and serious part of creating the financial map. There are a dime-a-dozen “short cuts” that “experts” have expounded and a very common one I have read is the “100 – your age” for how much equity you should have in your portfolio. I would say do not take these shortcuts at face value. Take your time and define allocations for each goal is the approach I have seen is a better idea than linking it with just one parameter, like your age. Each goal has time to achieve, an investment window, a withdrawal window, dependency, and priority that are specific to that goal and must be handled appropriately.

Looking back at Step 1, align the current assets to goals based on the priority and maturity of the assets. E.g. if you are salaried and have an EPFO account, earmark it for retirement and chalk a simple principle that this fund will only be touched when you retire. Mark this as your fixed income component of the retirement corpus. In this way, once you have assigned all the assets you have to each goal, assign current investments you are making to the goals. This will map the current assets and the investments you are doing regularly, and a clear picture of the gap will be available. The most important activity is to re-work the allocation based on gaps.

FIVE: Review

Financial planning is an activity in the continuum, it needs to be constantly revisited. I would say that once you create your first plan, every month recheck all the elements based on your learning and reading. It does not mean you need to change anything on the plan, you just check all the elements. It helped me as I found a few elements like a date of maturity I was assuming would have not matched the need and I needed to shift some investments to match the required outflow. As you gain confidence, your review can become quarterly, then biannually, and finally annually during Christmas break from work.

An important point is that any life event warrants a revisit of your goals, expenses, and a re-work of your financial map. This could be a new baby, new job, asset buying or sale, marriage, and so on; anything that impacts your financial map requires you to go back to the drawing board and rechecking the roadmap. E.g. Let us say your emergency corpus is done, your insurance needs are set, and you want to plan that Roman Holiday. You are about to start a new job and it comes with a double-digit hike that your financial allocations did not consider.

Also, review all your allocations, and as your goals near their time or target, make a conscious effort to reduce the risk in the portfolio. Do not procrastinate in this activity of rebalancing based on the risk you can take as sudden, unpredictable events can derail your plan. A case in point is the startling crash in equity markets in the last week of March 2020.

Conclusion:

The only thing constant is change. The best-made plans need to change and you need to on the constant lookout to increase your current income. Savings can be made only from income and any increase in input would have exponential benefits in investments considering compounding with TIME. Now, income can be increased by possibly shifting jobs, reskilling, identifying additional income streams, and developing them. Whatever the means (legal of course) the goal must be to increase net disposable income. Culturally many women have been conditioned to not talk about money, it is time to change that and our next generation should be taught to know its impact and power and also how to use it to advantage. Our mothers typically saved tiny amounts for a rainy day, our generation needs to look at it as a way of life so that our next generation’s perspective would be to look at it as a responsibility, accountability, and critical skill to master.