Limited savings, but numerous responsibilities is life by another name. And some of these responsibilities will run parallel to one another. For one, you can't delay saving for your retirement and you can't ignore your child's future either. Since increasing your pay or reducing expenses beyond a limit can't be an option always, we struggle with financial choices. We try to figure out the financial dilemmas that you will face during the different decades of life, tell you how to make efficient choices and optimise your allocation.
20S: Balancing debt against college choice
You are eyeing a coveted course to climb the corporate ladder. However, if you do not have a scholarship and your parents have not saved enough, is it worth taking a big loan? So, just how much sacrifice should a student (and often their parents) make to attain high-quality education? It is one of the first money decisions you will make which can have a long-term financial impact.
"It is important that you do not start your working life with the sword of massive debt over your head. Defaults could ruin your future and chances of borrowing later for a house or a car," says Anil Rego, CEO, Right Horizons.
Be conservative when analysing your potential for employment. "Take a base-case scenario for salary packages that can be landed 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.
Remember, this is a long-term loan and even a percentage difference in rates can save you a lot.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 a collateral. Even if it isn't a big asset, it can fund a part of the costs. If your parents have a fixed deposit, get an overdraft loan where you will have to shell out 1-2% higher than FD rates.
It makes sense to work for a few years, save some money and then apply for a course. Even if you are unable to save the full expenses, it will reduce your loan burden. "Use debt options to accumulate," says Rao. Since most top universities prefer students with some work experience, it also improves your chances of earning a scholarship.
30S: Managing a home-loan EMI or investing in equity to fund child's goals
You would choose your child's future any day over your dream house. It even makes more financial sense to delay buying a property . You can always live in a rented house as the rent increases at a much lower rate than the cost of education.However, if you delay planning for higher education, the investment in subsequent years becomes exponentially higher.
Advisors warn against a situation where you delay the purchase so much that your debt continues into your retirement. "After retirement, living in a rented accommodation can be stressful especially if you have to move every three-four years. Also, it is not a good idea to retire with debt," says Priya Sunder, director, PeakAlpha Investment, an investment advisory . Besides, the house can also be an asset, a collateral that can 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 higher, then it makes sense to bring down the cost of the property purchased and thereby reduce the EMI," says Sunder. Or, you can also choose to save opting for SIPs over EMIs. There is an opportunity cost to the loan taken to buy the property .So, suppose 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 invested Rs 70,000 through 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 your goals.
40S: Continuing with job or turning an entrepreneur
They say, it's best to take the plunge when you have no baggage. But at 40, you probably would have a dependent family and you still would not have finished saving for all your life goals. On the other hand, you might have accumulated liabilities such as a home and a car loan. A stable job with predictable income allows one to plan and save.
Turning an entrepreneur entails putting all these on the backburner till the new business becomes stable. It might not be easy to make a comeback if you fail. Getting a second opportunity would also depend on the industry and job profile.
Plus, you will be closer to retirement. "It can also happen that the entrepreneur utilises all her savings as capital. With risk of loss, she would have to start all over again with lesser time on her side to benefit from compounding," says Srikanth Bhagwat, advisor, Hexagon Wealth Advisors.
Even if you turn into an entrepreneur, you can't ignore taking some standard financial shields such as term and health insurance for all dependents, be debt-free and have savings of at least 12 to 24 months that can cover all 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.
50S: Choosing between the child's higher education and retirement
These two big goals may have colliding deadlines.While none of them can be ignored, financial planners believe you should prioritise your retirement corpus. Your child can get a scholarship or fund the education by taking 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, a certified financial planner.
Some may argue that it is better to work longer and save more than depending on an educational loan. "It is not difficult to find a job post-60 these days. Plus, being a guarantor to big loan when you do not have an income may not be a good idea," says Vivek Rege, CEO, VR Wealth Advisors.
60S: Investing a portion in equity or staying safe in all debt options
The thumb-rule is to keep moving your investments marked for retirement towards debt as you near 60. But that does not mean you can't re-invest the kitty in equity options. Considering they are your best chances to beat inflation, most advisors would recommend keeping a part in equities.
Although, the case for equities become stronger if you are still earning after 60, there is no need to abruptly stop investing, merely because you have retired.
(Economic Times)
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