Source: The Economic Times
Limited savings, but numerous
responsibilities. That's life for you. And some of these goals or responsibilities
will run parallel to each other. For one, while you can't delay saving for your
retirement, you can't afford to ignore your child's future either.
Since increasing your pay or reducing expenses
beyond a limit can't always be an option, we often struggle with financial
choices. We try to figure
out the common financial dilemmas that you will face during different stages of
life and tell you how to make efficient choices and optimise your allocation.
20s: Balancing debt against college choice
You are probably eyeing a course to help you
up the corporate ladder. But if you do not have scholarship and your parents
have not saved enough, is it worth taking a big loan? "Don't start your
working life with a massive debt. Defaults could ruin your chances of borrowing
later," says Anil Rego, CEO, Right Horizons, an investment advisory
company.
Be conservative when analysing your
employment potential. "Take a base case scenario for salary packages that
you can land after the degree.
The EMI for the loan should be 50% or lower than the net monthly pay," says Arvind A. Rao, Founder, Arvind Rao &
Associates.
As this is a long-term loan, even a
percentage difference in interest rates can save you a lot of money. Rather than going for an unsecured education
loan where you pay a higher rate of interest, see if your parents can get you a
secured loan and keep an asset as collateral.
It might make sense to work for a few years, save some money and then apply for
a course.
Tip: Be conservative;
The EMI for the loan should not be more than 50% of the potential monthly
salary that can be landed after the degree.
30s: Managing home loan EMI or investing in equity for child
You would choose your child's future any day
over your dream house. It even makes financial sense to delay buying a
property. However, advisers warn against delaying the purchase so much that
your debt continues into your retirement. "After retirement, living in a
rented accommodation can be stressful. Also, it is not a good idea to retire
with debt," says Priya Sunder, Director, PeakAlpha Investment, an
investment advisory firm. Besides, the house can be collateral to help you
borrow in case the education savings fall short.
You could consider a smaller apartment that
costs less. "If the education costs are expected to be high, keep down the
cost of the property and reduce EMI," says Sunder. Or, you can opt for
SIPs over EMIs. For instance, you take a home loan for Rs 1 crore for the next
20 years at 10% interest. You
would pay about Rs 1 lakh in EMI each month. Over 20 years, the interest cost
would be over Rs 69 lakh. Instead, if you rent a house for Rs 30,000 and invest
Rs 70,000 via an SIP each month, growing at 15% over the next 20 years, the corpus
would be close to Rs 10.5 crore, and tax-free, if invested in an equity fund.
This money could fund both goals.
Tip: Buy a smaller
house, which can also be collateral for a cheaper education loan. Or rather
than taking a huge loan, live on rent and use SIPs to build a corpus for both
goals.
40s: Continuing with job or turning entrepreneur
It's best to take the plunge when you have no
baggage. However, at 40, you probably would have a dependent family and not be
finished saving for all your goals. You might also have liabilities like home
and car loans. Turning entrepreneur would mean putting everything on the
backburner till the new business is stable. A comeback may also not be easy if
you fail. Plus, you will be closer to retirement. "If the entrepreneur
utilises all savings, in the event of loss, she would have to start all over
again with less time on her side," says Srikanth Bhagwat, Principal
Advisor, Hexagon Wealth Advisors.
Even if you turn an entrepreneur, you can't
ignore financial shields such as term and health insurance for all dependents,
be debt-free and have savings of at least 12 to 24 months to cover living
expenses. Also, it
is a bad idea to dilute your investments or assets that you may have earmarked
for other goals (say retirement) for initial funding.
Tip: It is a bad idea
to dilute your investments or assets that you may have earmarked for other
goals for initial funding.
50s: Choosing between child's higher education and
retirement
The deadlines of these two big goals may
collide. While neither can be ignored, financial planners say your retirement
corpus is the priority. Your child can get a scholarship or take a loan.
However, the bank won't extend you a credit because you do not have sufficient
savings post-retirement. Even if they do, a personal loan will always be costlier than an education loan.
"An
education loan creates a sense of financial responsibility in the child, allows
you to keep your assets and gives you additional tax benefits," says Bhuvana Shreeram, Certified Financial Planner. Some
may argue it is better to work longer and save more than depend on an
educational loan. "It is not difficult to find a job post-60 these days.
Plus, being a guarantor to a big loan when you do not have an income may not be
a good idea," says Vivek Rege, Founder and CEO, VR Wealth Advisors.
However, there is no guarantee that you will
find employment post retirement. On the other hand, even if your child chooses
an unconventional course where it is difficult to get a loan, if you have built
enough assets that can stand as collateral, the lender will sanction the funds,
that too at a more competitive rate.
Tip: If you have built
enough assets, your child can always take a education loan, where the asset can
stand as collateral.
60s: Investing in equity or in debt options
Keep
moving your investments earmarked for retirement towards debt as you near 60.
However, that should not stop you from reinvesting your kitty in equity options.
Considering they are your best chances to beat inflation, most advisers recommend
keeping a portion of the nest egg in equities.
Although, the case for equities becomes
stronger if you are still earning after 60. "Depending on your risk-taking
capacity and availability of funds, you can invest 15-25% in equities via SIPs
or in hybrid funds to beat inflation. However, you should have an investment
horizon of at least five years," says Pankaaj Maalde, Certified Financial
Planner. Adding the growth-oriented component will entail sacrificing immediate
consumption of that part of the corpus. Also, you cannot depend on your equity
investments for your monthly income needs.
Tip: You may continue
your monthly SIPs post-retirement, provided you do not depend on such
investments for your annuity income and have an emergency fund in place.
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