RIGHT WAYS TO MANAGE FINANCIAL DILEMMAS

May 23 2016 : The Times of India (Delhi)
RIGHT WAYS TO MANAGE FINANCIAL DILEMMAS


Chandralekha Mukerji



A step-by-step guide to dealing with choices one has to make about money, from youth to old age

Limited savings, but numerous responsibilities. That's life for you. On top of that, some goals or responsi bilities run parallel to each other. As increasing your pay or reducing expenses beyond a limit can't be an option, we often struggle with financial choices.Here are the common financial dilemmas you will face at different stages of life and how to make efficient choices and optimise your allocation.

DEBT VERSUS COLLEGE CHOICE

You are eyeing a course to help you up the corporate ladder. But if you do not have a 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 can ruin your chances of borrow ing 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. 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 a collateral. Or, work for a few years, save some money and then apply for a course.

HOME LOAN EMI OR INVESTING IN EQUITY FOR CHILD

You choose your child's future over your dream house. While it makes financial sense to delay buying a property, advisers warn against delaying the purchase so much that your debt continues into your retirement. “After retirement, living in a rented accommo dation can be stressful. Also, it is not a good idea to retire with debt,“ says Priya Sunder, Director, PeakAlpha Investment. Besides, the house can be a collateral to help you borrow if education savings fall short.

You could consider a smaller apartment.“If the education costs are expected to be high, keep the cost of the property low and reduce EMI,“ says Sunder. Or opt for SIPs over EMIs. For instance, you take a home loan for `1 crore for the next 20 years at 10% interest. You would pay about `1 lakh in EMI each month. Over 20 years, the interest cost would be over `69 lakh. Instead, if you rent a house for `30,000 and invest `70,000 via an SIP each month, growing at 15% over 20 years, the corpus would be close to `10.5 crore, and tax-free, if invested in an equity fund. This money could fund both goals.

CONTINUING WITH JOB OR TURNING ENTREPRENEUR

It's best to take the plunge when you have no baggage. However, at 40, you would probably 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. Even if you turn entrepreneur, you can't ignore financial shields like term and health insurance for dependents, being debt-free and having savings of at least 12 to 24 months to cover living expenses. It is a bad idea to dilute investments or assets that you may have earmarked as initial funding for other goals.

CHILD'S HIGHER EDUCATION OR RETIREMENT

While neither can be ignored, financial planners say retirement corpus is the priority.Your child can get a scholarship or take a loan, but 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 more expensive than an education loan.

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.

INVEST IN EQUITY OR DEBT

Keep moving your investments ear marked for retirement towards debt as you near 60. But that should not stop you from reinvesting in equity options. Given that they are your best chances to beat inflation, most advisers recommend keeping a portion of the nest egg in equities.

The case for equities becomes stronger if you are still earning after 60.“You can invest 15-25% in equities via SIPs or in hybrid funds to beat inflation. However, you should have a horizon of at least five years,“ says Pankaaj Maalde, Certified Financial Planner.