Juggling money for a large family

Regular readers might be taken aback at this new avatar of one of the most popular sections of the magazine. New readers might wonder about all the fuss. In the interest of full disclosure, let us try and explain what it's all about.

     Print Edition: January, 2010

Regular readers might be taken aback at this new avatar of one of the most popular sections of the magazine. New readers might wonder about all the fuss. In the interest of full disclosure, let us try and explain what it's all about. The Portfolio Doctor was intended to examine an individual's or a family's portfolio in light of the goals and risk appetite, and suggest ways to tweak the portfolio to meet these goals. As the magazine and its readership grew, we began to realise that this was a good idea for an individual, but not of much interest to most others. And so the decision to launch Portfolio Doctor 2.0.

The basic premise remains the same: how to rebalance a portfolio to meet specific goals. However, instead of pointing fingers at one person or family, we will be looking at the mistakes most of us make in similar situations. The readers who want portfolio advice will continue to get it; only, their mistakes will not be held up as bad examples. For that, we have decided to give the Portfolio Doctor its own whipping boy, Mr Neveright, and his wife. The Neverights are a quintessential middle-aged couple heading towards retirement. To us, they are what the Common Man is to R.K. Laxman; they look on bemused, as neighbours, family and friends plod on from one financial blunder to the next. And they can't help feeling that they know better. This is one of their more recent conversations:

MRS NEVERIGHT: Our neighbours just had a baby. Do you know what the new daddy gifted his wife to celebrate? A life insurance policy!
 
MR NEVERIGHT: That man will keep the insurance business going single-handedly. Didn't he pick up a health policy for his parents last year? What's next, pet insurance?

MRS NEVERIGHT: But he can mint money. I hear that every paisa saved on daily expenses is put into shares. Try taking his advice to invest our fixed deposit money.

Can you spot anything wrong with this conversation? A short answer would be, 'everything'. From blindly betting on risky instruments to underestimating the importance of insurance, most families make the same mistakes. For instance, a 2008 study titled 'How India Earns, Spends and Saves' revealed that just 24 per cent of households have life insurance cover. The more the number of dependants, the bigger the impact of such bloopers. Money Today spoke to some financial planners to chart out the best course of action for large families. Take a look.

The first thing to do is to prepare a family budget, ensuring that the basic needs of every member are met. Says Naresh Pachisia, MD, SKP Securities: "Start with compiling a list of financial goals, then prioritise and economise where required." It is crucial to include the entire family at this stage because a roadmap is pointless if forgotten goals are tacked on in a haphazard manner.

Apart from allotting funds to meet financial goals, the budget should also have an earmarked emergency fund. This will ensure that unforeseen events such as hospitalisation, temporary loss of income due to an accident and the like are taken care of without derailing the financial plan.

Given the escalating medical expenses, it would be foolish to delay taking medical cover to ensure that your family is adequately covered. It could be Murphy's Law of Illness at play: you could fall sick at the most inopportune time, say, just when you have lost a job. Multiply the probability of this happening with the number of people you support to get the big, bad picture. So, take a family floater plan along with a policy for your ageing parents today.

Your insurance needs don't stop at hedging health risks. You definitely need a sizeable life insurance cover as more people are dependent on your income. This is why we have advised Gwalior-based Arindam Bhattacharyya to increase his life cover by buying a term plan of Rs 15 lakh, in addition to his kitty of nine policies.

Says Anil Rego, CEO, Right Horizons: "Compute the value of human life, including your liabilities, and take adequate life cover." Also, ensure that key needs, such as your child's education or marriage, which are not unexpected, are taken care of. To tackle all bases, consider options such as income benefit rider, waiver of premium rider, etc. While it's morbid to prepare for your demise, you will do your dependants a favour by taking time out for estate planning, preferably, while your mental faculties are intact. Also, don't forget to fill the nomination section in your investments.

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