Financial goals are changing: Do you really know the future expenses you need to save for?
Newer expenses and goals call for a new plan to avoid the risk of overspending and debt trap.
it will be remembered as the decade when the Indian middle class threw caution to the winds and turned aspirational with a vengeance. Between 2009 and 2019, the share of discretionary expenses in a household’s monthly outgo shot up from 10-20 percent to 25-60 percent, according to financial planners. Saving for a child’s marriage made way for saving for an international vacation. As an ET Wealth study involving 22 financial planners and wealth managers reveals, over the past decade, middle class households pursued the good things in life on the back of rising disposable incomes and consumerism. And it reflected in the way goals were prioritised. The study captures the changes in financial behaviour over the past decade and lays down a roadmap for the next 10 years, factoring in likely future goals.
Tracking the change
In 2009, the top five goals of an average Indian family included children’s education, marriage, buying a house and a car and saving for retirement (see chart). In 2019, international vacation figures prominently in the list, with almost every participant in the study identifying it as a key goal of their clients. On the other hand, children’s marriage seems to have dropped down the list of priorities. More than half of the study’s participants this was a key goal for their clients in 2009. However, only a quarter identified it as a priority goal in 2019. Children’s education, buying a house and retirement, however, remain the constants in the list.
Lifestyle inflation is on the rise
People are spending more, without ascertaining the necessity.
Lifestyle inflation figures in percentage as estimated by financial planners (in numbers).
Travel apart, investing in health, buying expensive gadgets, luxury cars and club memberships, entrepreneurship and early retirement have emerged as the other offbeat goals Indians wish to pursue. “Absolute increase in discretionary expenses over 10 years would be 100%. The share in household budget has gone up from 20-25% in 2009 to at least 40% now,” says Ashish Shanker, Head, Investments Motilal Oswal Wealth Management. Rising lifestyle inflation is the new reality. Frequent gadget upgrades, purchase of fitness devices, private cab rides, gated housing complex charges, salon and spa expenses, pet-related spends and so on have pushed up the share of discretionary expenses. “Thanks to online cab services, shopping and food delivery, people have got into the habit of spending more, without ascertaining the necessity. This is bound to have a bearing on their future goal-related investments,” says Pankaj Mathpal, Founder, Optima Money Managers.
Holidays have become an important goal for Indian households, even as funding children’s marriage has taken a backseat.
Rank 2009 2019
1. Children’s education Children’s education
2. Buying a house Vacations
3. Retirement Buying a house
4. Buying a car Retirement
5. Children’s marriage Buying a car
6. Vacations Upgrading lifestyle#
7. Health needs Children’s marriage
8. Supporting parents Starting a business
9. Upgrading lifestyle# Health needs
10. Paying off loans Paying off loans
*Based on views of 22 respondent financial planners who identified these as high priority goals. #Gadgets, appliances, fashion, club memberships etc.
New challenges, fresh approach
These newer expenses and goals call for tweaking the financial planning approach to avoid the risk of overspending and a debt trap, say experts. Unfettered use of credit cards, taking personal loans to buy gadgets and travel and falling prey to cashback offers are key mistakes that individuals make today. These could lead them into a cesspool of debt. “Categorise spends into immediate, short-term, long-term and unnecessary buckets and stick to this priority list,” says Nisreen Mamaji, Founder, Moneyworks Financial Advisors.
Households spending more on discretionary expenses
Such spending needs capping to safeguard future.
Figures denote share of discretionary spends in household budgets
The other strategy is to acquaint yourself with the gravity of challenges that await after retirement, to help put a lid on discretionary expenses. “We help clients draw up a financial plan with a projected cashflow statement till retirement which shows the annual savings available for important goals. This helps decide the limit on discretionary spending,” says Rahul Jain, Head, Edelweiss Personal Wealth Advisory.
Underestimation of retirement needs and lack of patience in face of market turbulence or shortterm needs figure prominently in the list of mistakes that individuals make today. Remember, indiscriminate or impulsive spends can either reduce your wealth as you would have to dip into past savings or create obstacles to future goals if you are borrowing to finance such expenses. “If expenses are funded by present income, then investible surplus is reduced. If it’s out of past income, then you are reducing wealth. If they are being financed by future earnings, it means that you are borrowing to spend,” says Neeraj Chauhan, Founder, The Financial Mall.
Equity investing on the rise
However, households still buy endowment plans to save for future.
Figures denote share of equities in a household’s portfolio
Despite an increase in financial literacy, most financial planners identified buying endowment plans for tax-saving and long-term goals like children’s education and retirement as some of the key mistakes that individuals make today. Even with portfolios laden with multiple policies, however, they continue to be underinsured for both life and health (see table). Over 85% of study participants say while awareness around insurance has increased, most are underinsured in case of life cover and rely on their employers’ group policy for health. “Even those who have individual health policies buy a Rs 5-lakh cover and assume this is adequate, not realising the cost of inflation. For term cover, they rarely check human life value, but arbitrarily cover themselves for Rs 1-2 crore,” says Puneet Oberoi, Founder, Excellent Investment Advisor.
What future expenses will look like
Some expenses that do not weigh heavily on your finances today and seem like luxuries could become must-haves in future.
2. Higher retirement corpus
3. Gadget-driven lifestyle
5. Inflated water bills
7. Senior care
10. Pet care expenses
Ranks reflect number of financial planners who identified these as futuristic expenses; education ranks lower as fewer financial planners saw this as a ‘new’ expense.
Besides buying a pure risk life cover that is equal to at least 10-15 times your annual income, ensure you buy a health cover of at least Rs 5 lakh and review it every five years. Also, to manage health expenses, do not rely solely on a health insurance policy. “Change in lifestyle and rising medical costs have increased health-related expenses. Maintaining a separate health and contingency corpus has become very important,” says Amar Pandit, Founder, Happynessfactory.in. On the positive side, though, the share of equities in retail investors’ portfolio has seen a rise, as they have warmed up to this asset class over the years. Close to half of the financial planners who participated in this study said equity made up just 0-29% of their clients’ asset allocation in 2009. In contrast, over half of them said the share was between 30-70% in 2019.
Are Indians adequately insured for life and health?
Most rely on employers’ group policy for cover.
Figures denote the response of financial planners.
Eye on the future
Clearly, between 2009 and 2019, the composition of household finances and goals has seen significant changes. The next 10 years are unlikely to defy the ‘change is the only constant’ adage. According to financial planners, some expenses that do not weigh heavily on your finances today and seem like luxuries could become must-haves in future. These include cost of hospitalisation with single occupancy, senior living expenses, inflated water bills due to paucity, high-end security systems, gadgets, regular upskilling, pet-related expenses, installing air purification plants at home and so on.
“Financial planning will soon be the norm, rather than the exception for such expenses, as water gets scarce and people struggle with inflated utility bills. This happens as people shift to renewable sources,” says C.S. Sudheer, CEO, Indianmoney.com. Besides, one will have to plan for regular goals like retirement and children’s higher education and create additional cushion to deal with unexpected situations that could emerge in future. This will ensure your planned retirement corpus—taking into account your current lifestyle—remains shock-proof. Instead of 10% of your income, save 20% of your salary towards creating a retirement corpus. Target equities, the asset class with the highest return-generating ability over the long-term, to create a bigger kitty. Instead of following the 100-minus-age thumb rule for determining equity allocation, consider the 120-minus-age formula. Also, look at newer, tax-efficient avenues like National Pension System (NPS) to funnel meant for retirement.
You will need a bigger contingency corpus, over and above the standard six months’ expenses in a liquid asset. “Planning for job losses and redundancies is a must as such incidents could be more frequent in future,” adds Vishal Dhawan, CEO, Plan Ahead Financial Advisors. Set aside a larger corpus equivalent to 9-12 months’ expenses. He recommends controlling lifestyle expenses and increasing exposure to growth assets like equities to beat inflation, besides ensuring that your portfolio has exposure to international funds for diversification.
Similarly, investment for long-term care of senior citizens, your parents or yourself, is non-negotiable. “Health insurance apart, factor in wellness and non-hospitalisation expenses too. In addition, be prepared for year-on-year 15% inflated outflow for lifestyle expenses,” says certified financial planner Bhakti Rasal.
To prepare for a high-cost future, cut down on lifestyle expenses today. Maintain a healthy savings ratio of at least 30% of your income. “If a family is able to clock 30% savings, then they can be flexible as to how they would like to spend the rest 70%,” says Rohit Shah, Founder and CEO, Getting You Rich. Similarly, prioritise your retirement. “You can manage children’s higher education through loans, but no bank will give you a retirement loan,” says Melvin Joseph, Founder & Chief Financial Planner, Finvin Financial Planners. He advises focus on liquid assets and shunning real estate as investment. Other goals need planning too. “If you wish to upskill, plan one-two years ahead. Set aside money monthly in a liquid asset,” says Tejal Gandhi, Founder, Money Matters.
Crystal ball-gazing has its limitations. Besides the ‘newer’ expenses listed earlier, the future could see the emergence of completely unforeseen expenses, which would need an investment buffer. “Therefore, you have to start setting aside 10% of your income every month for these futuristic expenses,” says Rachit Chawla, Founder & CEO, Finway.