If you are one of the two earning members in a family and and need to quit work, will you be able to manage? Or will you have to drastically change your lifestyle?
Many working couples have toyed with the idea of living on one income for some years. The most common reason is to take care of their children. The problem is that in an era of jumbo home loan EMIs and sky-high school fees, it seems nearly impossible.
Kolkata-based Suparna Nag did not get the opportunity to think about these issues, much less to work out a solution. “I wish I had time to plan the transition to a single income,” she says.
Nag was transferred out of Kolkata when she was on maternity leave. As shifting was not feasible, Nag quit her job in May 2008. At the time, she was earning about Rs 20,000 a month, and her husband brought home Rs 30,000.
Now, with a second child, monthly expenses have shot up. Even as they spend about Rs 15,000 a month, the total income has shrunk by 40%. Had the couple been able to plan Nag’s exit, things could have been easier.
The first step in the planning process is to calculate the extent to which your family finances will fall short when one spouse quits working. The simple and not an entirely correct way is to deduct that salary from the combined income. For a more realistic estimate, factor in all the hidden costs as well—the commute to office, parking fees, eating out, office gifts, office wardrobe, etc. Also, you might be spending on additional household help or daycare facilities for your children.
Maneka and Pramod Pal Singh, Delhi (with children)
Special situation: Family shifted from double to single income
Who quit: Maneka left her job as marketing manager in an airline company in April 2008
Why: To stay at home with children
Last monthly income: Rs 45,000
Impact on family finances:
• No alternative source of income for personal expenses
• High cash component (job severance package) in personal portfolio
• Insurance cover has not been revised: If you are planning to quit, increase your life cover in advance because it will be difficult to get adequate cover later on
• Invest to generate passive income: If your investments for specific financial goals are not compromised, invest lump-sum money in debt instruments
"If couples plan in advance, the shift to a single income can be done without compromising on important financial goals of the family."
— Suraj Kapur, Senior manager, SRE Financial Planners
|Click here to see graphic: Can you swing it?|
Once you know the deficit, downsize your budget, suggests Suraj Kapur, senior manager, SRE Financial Planners. Initially, this might seem like an impossible feat. But there is considerable flab in every budget that can be trimmed.
As always, start with discretionary expenses like entertainment and apparel. Chances are that you’ve opted for a phone plan that charges you for extras you never use; change it and you’ll have lesser phone bills.
If you have taken loans (other than a home loan), try to prepay them. Withdraw from fixed-income investments like fixed deposits to repay car and personal loans. But, warns Kapur, don’t do this by wiping out your debt investments entirely. Remember, your capacity to invest will be almost zero in a few years.
The only exception to prepaying loans is your home loan. The amount is too great to prepay, so factor in the EMIs into your fixed expenses while calculating the economic feasibility of living on one income. But if the loan has been taken by the spouse who is planning to quit work, you can shift it in the name of the earning member. This will transfer the tax benefits of home loan EMIs to the working spouse. Once your future cash flows seem under control, beef up your emergency fund to include six months’ expenses.
The asset allocation of your family’s portfolio will also change. After the budgeting exercise, you should know how much to invest for your financial objectives. The one thing that you shouldn’t touch is your monthly (or lump-sum) investments for medium- and long-term goals like children’s education and retirement. If even after restructuring your budget, you cannot manage to do this on one income, then, ideally, postpone the plan to quit working for a few years.
This is why you should plan early. You can time the switch to a single income without upsetting your plans too much.
Besides investing for your goals, try to channelise some savings in debt instruments to generate a monthly income. Ideally, this amount should be large enough to take care of the personal expenses of the spouse who is quitting work.
One source of such lump-sum investments is your severance package (generally two to three months’ income). Though it is not recommended, if you withdraw money from your provident fund, the total amount could be significant.
For instance, a few weeks ago, Nag received her job termination package and withdrew her provident fund investments. The total amount is close to Rs 4 lakh. As they are still planning their financial goals, she can use this money to prepay an existing loan (she has an outstanding personal loan of Rs 90,000) or invest the amount for short-term goals like buying a car.
Most importantly, before putting in your papers, make sure you review your insurance cover. If it is less, apply for an additional cover when you are still on the pay-roll.
Delhi-based Maneka Singh quit her job as a marketing manager of an airline company after 13 years. Like Nag, her decision too was impromptu. Consequently, Singh did not pad up her insurance cover of about Rs 3 lakh. If she does so now, she will find the going tough. Insurance companies offer a meagre cover, if any, to non-earners. As you are not going to earn after some time, opt for the cheapest form of insurance—term plans. Don’t forget to proportionately increase the insurance cover of the working spouse too.