Mother’s Day: Here is how a single mother can manage her finances efficiently

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Updated: May 10, 2020 5:04 PM

A single mother should make sure that her earnings are divided into spending, emergency funds, and investments so that sufficient wealth is generated for the realization of future financial goals. If you are also on the same boat, here is how you should go about it.

Mother’s Day 2020, financial planning, managing debt, tax benefit, Equity Vs Gold Vs Bond Vs FD, where to invest in current COVID-19 crisis, invest according to market risk, investment tenure and needs, small savings scheme, bank deposit, interest rateOne key aspect to remember is that all policies should have the child or children as the nominee. If the child is below 18 years of age, there has to be an appointee.

As a single mother one has to shoulder responsibilities both at home and those on the professional front to ensure a steady flow of finances. Hence, financial planning is a must. According to Max Life Insurance’s India Protection Quotient survey – reflecting women’s changing dynamics with finance, 70, and 54 per cent of women save for their kids’ education and marriage, respectively, 76 per cent of women have a life insurance policy, and 29 per cent women consider medical emergencies as a greater priority and save for it.

Experts say, as a single mother, one always needs to take calculated decisions throughout the cycle of motherhood to secure their child’s life. Mohit Bhatia Head – Sales and Marketing, Canara Robeco Mutual Fund says, “Savings might just not be enough for being able to achieve all that is aspired for but laying down a financial plan and sticking to it through regular investments is of utmost importance. A single mother should make sure that her earnings are divided into spending, emergency funds, and investments so that sufficient wealth is generated for the realization of future financial goals.” If you are also on the same boat, here is how you should go about it.

Life insurance

One of the first steps is purchasing term insurance. It ensures financial security for the child or children. Srinivasan Parthasarathy – Sr. EVP, Chief Actuary and Appointed Actuary HDFC Life says, “The sum assured, should be sufficient to act as an income replacement in her absence. Ideally, she should go for a sum assured that is equivalent to 15-20 times her annual income.” Term insurances are pure protection plans that provide a financial safety net for the children in case of any unfortunate circumstance. A term plan with regular income, or pension after a certain age, could be an ideal option. These policies pay death benefits apart from regular monthly income to the policy-holder or to the nominee.

To start with a mother should firstly calculate her Human Life Value (HLV) which is the amount that she sets aside for her family’s consumption after deducting the cost of her own needs and tax, from her gross income. Karthik Raman, CMO, and Head – Products, IDBI Federal Life Insurance says, “By calculating her economic value to her family and the approximate number of years of service left, she can decide on the appropriate amount of life cover for herself. Additionally, as her income grows over the years, her life cover would also increase proportionately and she may need to purchase additional coverage.”

Cover against the risk of disability and disease are equally important. Samit Upadhyay, EVP, Chief Financial Officer, and Head Product, Tata AIA Life says, “Most term plans offer cover against disabilities and critical illnesses through riders. Such solutions ensure that all three risks – death, disease, and disability are covered in one solution. One can also opt for a standalone personal accident policy and critical illness plans.”

Health Insurance

Health insurance plans ensure financial support in case of a health emergency. There are generally two types of health insurance plans. Those that provide reimbursement in case of hospitalization and those plans which provide a lump sum payout in case of diagnosis of a critical illness such as cancer or a heart ailment. Also, there are riders available along with life insurance products which cover accidents, disability as well as critical illnesses. It is better to get a hospital cover of at least 3-5 lakhs (depending on the family members included) and critical illness plans with cover upwards of Rs 10 lakhs because medical costs are increasing.

Health insurance is very crucial especially in today’s times as young kids are susceptible to many ailments including covid19. While choosing the right health insurance policy a few things that single mothers should keep in mind are the proximity of the network hospitals provided by the insurance company and the minimum sum assured. Anand Roy, Managing Director, Star Health and Allied Insurance, “Single comprehensive policy with adequate coverage would be sufficient for a single mother and children. So in today’s times, a minimum sum assured of Rs 10 lakh and Rs 5 lakh would be essential for mothers living in metros and non-metros respectively.”

When purchasing critical illness plans ensure that the plan covers all stages of the illness. For example, in a cancer product, the policy should provide financial support on diagnosis at the early stage. There are a lot of plans available in the market, however, not all of them cover the early stages of cancer. One key aspect to remember is that all policies should have the child or children as the nominee. If the child is below 18 years of age, there has to be an appointee.

Short-term and long-term investments

It is necessary to invest to build a corpus be it for short-term goals such as a vacation or buying a luxury item or long term goals such as buying a house, children’s education, retirement, etc. Experts say taking out a monthly Systematic Investment Plan (SIP) in the name of the children is one of the best options. Mutual Fund schemes offer various categories of products suited for varying investment horizons with easy investment constructs like SIP. These regular periodic investments serve as vehicles for long-term wealth generation as well as building a goal towards a future cash outflow like a loan repayment.

Depending on one’s age, income, and risk appetite, one can also choose traditional or unit liked insurance plans. Tradition plans invest largely in debt instruments and are good for those who are risk-averse. While ULIPs work well for individuals who are willing to take the risk of investing in equities, these plans offer potentially higher returns.

Retirement planning is another long-term goal. One can build a corpus by investing in a savings and investment plan and on maturity, the lump sum can be used to purchase an annuity. There are immediate as well as deferred annuity plans available, one can choose as per their planned retirement age.

Emergency funds

As a thumb rule, at any given point of time, one should have an emergency fund in the form of a regular savings account. This could be equivalent to 3-6 months’ salary, and the size of the fund should keep expanding in accordance with rising monthly expenses. Experts say keeping this as a fixed deposit may not be a good idea. The objective of this fund is to provide liquidity to meet any financial emergency which can impact the family. One could consider parking their emergency fund in high yielding savings accounts or short tenure debt mutual funds (MF) like Liquid Funds or Ultra Short-Term Funds. Investing in such a category of MFs takes care of the liquidity needs and also helps earn returns that may be more tax-efficient compared to bank deposits.

Tax benefits

There are various financial savings instruments available that provide tax benefits includes health insurance, ELSS, Tax saving fixed deposits, PPF, NPS, and more. Avenues like insurance, be it life or term could be one of the ways where one can get tax benefits under Sec 80C and Sec 10(10D) of the Income Tax Act, 1961. Another avenue where one can not only save taxes but also generate potential wealth is investments in products like NPS and ELSS of mutual funds. Bhatia says, “Under section 80C of the Income Tax Act, investing in ELSS every year can help reduce the tax burden and opting for a SIP (Systematic Investment Plan) in an ELSS also proves beneficial by helping in wealth generation in the long term.”

Experts suggest tax benefit should not be the key deciding factor when it comes to purchasing the product. One could also take the help of a professional tax consultant or financial advisor to keep abreast of the latest changes on tax aspects of various investment products as applicable to one’s portfolio.

Managing Debts

The famous saying ‘If you have to finance it, you likely can’t afford it’ seemed to be correct till some time ago, but now experts say with proper planning, one could actually aspire to achieve more than they can afford. The important thing to keep in mind here is not to fall in a ‘debt trap’.

Firstly, it is necessary to pay off any loan that has a high rate of interest such as credit card outstanding or personal loans. Keeping an individual’s monthly debt installment outflow below one-third of their monthly remuneration is a thumb rule. Additionally, the urge to finance an early unplanned lifestyle purchase should be avoided, as one should definitely not compromise on the regular monthly savings (set aside for cash flows needed towards planned future financial goals).

Experts suggest one could consider purchasing a life insurance policy that covers loans such as home loans, personal loans, etc. This will enable one to ensure that the family/ children are not burdened with the loan in the absence of the breadwinner. Experts suggest once an investment build for goals such as future cash outflow like a loan repayment generates a sizeable corpus, investors can either redeem and pay off their debt at once or opt for mutual funds Systematic Withdrawal Plan ( SWP) and set off staggering debt payments.

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