A woman’s role in society has evolved significantly over the years. From being predominantly homemakers, women now frequently shoulder the dual role of earning and taking care of the home and family. As a result of these overwhelming responsibilities, women may ignore their own needs. Indeed, despite its importance, they may neglect to manage their finances, which is critical for their own needs, especially during retirement.
Financial planning is all about managing your income, wealth and expenses to achieve financial security and fulfill your financial goals. The process of financial planning remains the same regardless of gender; what differ are the reasons for planning. Generally, financial planning is needed to help people fulfill their responsibilities towards their dependents (e.g. spouse, children, and parents), meet their financial goals and achieve security during retirement.
Further to the reasons mentioned above, women have some additional compelling reasons to undertake financial planning, which include:
Increase in income: Larger and ever-increasing numbers of women are earning professional degrees to build a career and earn a second income for the family. Women are not only climbing the corporate ladder and reaching the position of chief executive officer and managing director in corporations, but they are also starting their own businesses and achieving success. At this stage, the money earned needs to be managed and allocated towards expenses and investments.
Inheritance: Women today are inheriting money, property, jewelry, and other valuables from their parents and there seems to be an equal distribution of wealth among siblings instead of the assets being split among just the brothers. Therefore, it is important to know what to do with this inheritance. Suitably investing and nurturing this inheritance will help women achieve financial security.
Motherhood: Starting a family implies a great shift in responsibilities for the woman, who has to change her priorities to bringing up the child. She may even need to take a break in her career until the child becomes reasonably independent. In this case, she will definitely need to have some accumulated wealth to meet her personal expenses and remain reasonably financially independent during her career break.
Divorce and separation: Women should be prepared for unforeseen events that may occur in their life - especially if they are dependent on their partner financially. A significant increase in the number of married couples separating or divorcing has occurred over the years. In such a situation, the woman is left to sustain not only her own needs but also the needs of the children. If the woman receives alimony, she can manage this money to utilize it towards financial security.
Lengthening life spans: Life expectancy has been increasing over time due to medical advancements. Statistics also indicate that women tend to live longer than men. This implies needing sufficient wealth to sustain oneself over a longer time frame in retired life.
Health issues: Although life spans have been increasing, unfortunately, this increase has been accompanied by increasing health issues, especially those related to women such as ovarian cancer and breast cancer. Not only are afflictions increasing, the cost of healthcare has also risen, which means needing a larger corpus to fund hospitalization and medical care in case of illness.
Indulgence: With an increasing number of brands making their products available through online shopping sites and apps, as well as in offline formats such as malls and shopping centers, a woman will likely indulge in some amount of shopping. If she works in a corporation, she will also need clothing appropriate for her position. All this needs to be funded.
Being financially independent and self-sufficient helps a woman not only deal with challenges but also retain a high level of self-esteem and confidence. To achieve financial independence and enhance income, financial planning is a must.
Financial planning and investing tips
Here are five tips for better financial planning and investing:
Tip 1: Assess your risk profile. Your risk profile suggests the amount of risk you are able to take in terms of investing. This depends on various aspects such as your age, number of persons who are financially dependent on you, your income and the amount of wealth you have already accumulated, among other factors. Additionally, it depends on whether you are comfortable taking risks. For instance, women who are young, unmarried and with no dependents can take a higher level of investment risk than women who are married with children and dependent parents.
Based on your risk profile, you can arrive at your asset allocation. This means deciding how much of your wealth should be invested in equity and how much in debt. Equity investing carries a higher level of risk while also providing a higher level of potential returns. In contrast, debt investing carries lower risk but also offers lower returns. Taking the above example, a young, single woman with no dependents should invest a higher component in equity since she has a higher risk-taking capacity.
Tip 2: Invest before you spend. To build wealth, you must invest a portion of your income regularly. To maintain this discipline, making your investments before you start spending is a good idea. Using the systematic investment plan (SIP) facility offered by mutual funds will ensure that the amount you invest is directly transferred from your bank account into the investment funds you have chosen. In SIP, you invest a fixed amount every week, month or quarter in a mutual fund of your choice. A famous quotation from Warren Buffet comes to mind: “Don’t save what is left after spending. Spend what is left after saving.” We would only replace the word ‘save’ with ‘invest’.
Tip 3: Invest at least 10%-20% of your income. It’s important to invest a meaningful amount. A minimum of 10%-20% is fine. However, if you can invest a higher amount, that’s even better. While you may be able to invest more in some months, in other months, due to large or unexpected expenditures, your investment component may be reduced; at these times, you must attempt to invest a minimum of 10% of your income. Remember, a lower cap of at least 10% and a no-holds-barred higher cap will be your friends over the long term.
Tip 4: Make your gold glitter. Indian women are very fond of gold. Most often, this affinity for gold takes the form of physical gold (i.e. jewelry). While gold is a good investment, physical gold may not be suitable since it involves a high cost (e.g. labor charges for designing the jewelry, loss of gold in jewelry re-design) and also raises the question of how to store this gold safely. Experts recommend gold in the form of gold exchange-traded funds (GETFs) as more suitable if you are looking at gold as a long-term investment option. GETFs are offered by mutual funds and are financial securities that are traded on the stock exchange where the underlying asset is gold (which is usually of 99.99% purity). Investing in GETFs offers a number of benefits – assurance of the purity of gold, no need to incur storage costs, and high liquidity. Additionally, you don’t need to incur design charges; however, you will incur a marginal amount of charges for holding the gold in dematerialized (DEMAT, or electronic) form.
Tip 5: Buy protection through insurance. Every woman must consider buying insurance for protection. While health insurance is a must for all women, life insurance depends on whether the woman has dependents. In the case of health insurance, make sure you take coverage for women-related health issues. To decide how much life insurance to buy, it’s important to assess your human life value (HLV). This is the amount you would provide your dependents over your earning life. Insurance is not an investment but rather a hedge against unfortunate events that may affect your earning ability.
Remember that men and women are no different when it comes to financial planning. However, the reasons they want to invest may differ. Also, they may want concepts to be explained differently – in an easy to understand, relatable way.
Consult a financial advisor to help you take the right financial decisions towards financial independence.
- Managing finances is critical for a woman to fulfill her needs.
- The process of financial planning is the same irrespective of gender; the reasons for planning differ.
- For a woman, reasons for planning also include:
- Managing the surplus from her earned income.
- Managing her inheritances.
- Staying financially independent during motherhood, divorce and separation, a longer life span and in a situation of poor health.
- Having a surplus for indulgence.
- 5 critical tips for financial planning and investing for women are:
- Assess your risk profile
- Invest before you spend
- Invest at least 10-20% of your income
- Invest in gold if you have to, through ETFs
- Buy protection through insurance