Act now to put derailed finances on track

FINANCIAL PLANNING Single mothers should purchase adequate insurance, and start an emergency fund

Being a single mother in India is no mean feat. Raising the children singlehandedly, balancing the roles of both mother and father, while handling the pressures of a job is truly commendable. As a single parent, they alone are responsible for the financial well-being and security of their children and their own. While they are already winning the game of life, here are a few financial tips that will help them ace the game of personal finance as well.

Start budgeting

To begin with, you must have a clear idea of what is on your financial platter. Get an idea of all the cash inflows and outflows you have. What is your family income? Are you eligible for compassionate assistance? What is the amount of alimony? Do you have any secondary source of income? Once you have compiled all the income sources, you will have a clear idea of how much is flowing in.

The next step is to check the outflows. Check for loans, EMIS, mortgage, etc. Were any investments made in your name, or were there joint investments? What are the family’s fixed expenses? Make a list of these questions and answer them. By doing this exercise, you will become aware of your current financial situation and how much work is required on it. You can explore the wealth management apps available online that can help you organise your cash flows.

Build an emergency fund

Next, start setting aside a certain sum of money to build an emergency fund. This amount should be enough to take care of your kids’ and your own expenses, in dire situations. Ideally, an emergency fund should equal six months’ worth of expenses. Bear in mind that this fund should be used only when there is an actual emergency, such as a medical emergency or a job loss, or any other unplanned event which would require financial assistance.

Your emergency fund should be invested in highly liquid instruments that give you maximum capital appreciation. A good option is liquid funds that can offer you returns as high as 7 per cent. Go for the ones that offer instant redemption facility.

Start SIPS to meet long-term goals

Only by setting long-term goals will you be able to bring your financial life back on track. Ponder over all the major things you need to fund in the future. These may include your child’s education, wedding, buying a home, buying a car, setting up a business, saving for your own retirement, or anything that you have dreamt of.

With these goals in mind, develop a plan for achieving them. How much money will they require? How much time do you have? You can club all short-term and long-term goals and start SIPS in mutual funds to gradually build up a corpus.

While debt funds work well for short-term goals, to fulfill long-term goals you can opt for a diversified equity portfolio and start investing via a systematic investment plans (SIP). You can begin with as low an amount as ~500 to begin with, and increase the amount subsequently. Plenty of online SIP calculators and other tools are available which you can use to find out how much you will have to invest via the SIP route each month to accumulate the required corpus within the desired timeframe.

Especially with long-term goals, SIPS are highly rewarding as you get the advantage of the power of compounding, which empowers your money to grow over the course of being invested. Power of compounding is the basic principle behind the growth of money: the amount you receive as return on your investment is added back to your principal investment every year. Thus, the interest gets compounded, generating greater returns.

You can always seek financial advice from experts. But if you plan your day well and take out just a few minutes to read and understand the financial industry and the stock market, you will be able to invest in the direct plans of mutual funds which are less expensive and give you better returns on your investments. Many online investment platforms are available that give you all the resources you need to make financial decisions by yourself as well as manage your investments, free of cost. Explore them.

Plan your taxes

One ignored area when it comes to managing finances is tax planning. A vast majority of people wait for the last minute to save taxes and often invest in avenues that may not be the best for them. Assimilate tax planning into your financial plan. Seek avenues to optimise your taxes that not only help you claim relief but also help you grow your wealth at the same time.

For instance, you can invest up to ~1.5 lakh in equity-linked saving schemes (ELSS) or tax saving funds. They will not only help reduce your tax outgo but will also offer better capital appreciation. You can also explore other options under Section 80C like Public Provident Fund, Sukanya Samriddhi Yojana, etc and see if they suit your needs.

Buy adequate life cover

While insurance is not an investment and should not be viewed as one, it is equally important. Getting your life covered with optimal insurance is a must these days. Get adequate life and medical insurance cover to ensure maximum financial security for your dependants.

Life insurance will ensure your kids will have sufficient funds to take care of themselves in case of an untoward event. You can arrive at the right life insurance cover by factoring in the number of dependants you have, existing loans and liabilities, existing assets and whether your children have any special needs. Term insurance should at the very least be 10-15 times annual income.

Buying health i nsurance will help overcome any medical incidents which may otherwise burn a deep hole in the pocket. Buy a floater health cover worth ~10-15 lakh, depending on what you can afford.

Amid all this, don’t forget to keep some money aside for that occasional splurge. After all, what good is money if it can’t buy you small joys? Be immensely proud of yourself for how far you have come and how well you have managed your life. Take small steps towards fortifying your finances and make your money work for you. Soon, you will be able to sit back, relax and enjoy the fruits of your labour.