How to Plan for Major Life Events That Impact Your Finances

Financial planning is essential - no two ways about that. But your financial plan only has meaning and weight if it is aligned with specific life goals and events. Without that, you are merely saving or investing with no end goal in sight. This will leave you unprepared for any specific goal that you may set your eyes on later in life.

A financial plan or a savings plan that is not linked with specific life events is like walking into an unknown arena with your eyes tightly shut. In both cases, you have no idea where you are heading.

So, to give your savings plan some direction and merit, you need to link your finances and investment choices with the key events that life may hold in store for you. Not sure what these major life events are? Don't you worry, because in this article, we'll take you through the major milestones or contingencies that you should be prepared for.

6 major events in life that you should plan for

No two people have the same life trajectory. That said, there are some events and milestones that are common to most individuals. Here are 6 such major life events that your financial plan should cover.

1. Your education Education is the first major milestone in everybody's life. In India, parents typically pay for their children's education. So, you perhaps already have this major life goal covered. However, in certain cases, people may have to fund their own education.
   For instance, in case the parents are unable to afford the cost of quality education, or if the individual in question wants to pursue an additional graduation or post graduation course mid-way through their career, the costs of education will have to be borne by the person enrolling in the course. If you think any of these scenarios may play out in your life, your financial planning needs to make room for this life goal.

Financial products to help you meet this life goal: Typically, a student loan is the best financial product to rely on if you wish to check off this milestone. Check out the general features and benefits of student loans in India, so you can create your financial plan accordingly.

• High loan amounts, with collateral-free borrowings up to a specified limit
• Wide range of assets like house property, fixed deposits etc. accepted as collateral
• Preferential interest rates for borrowers enrolling in specified top colleges and institutions
• Flexible loan repayment periods
• Moratorium during the course period and for an additional duration thereafter, after which the repayment of loan begins
• Loan insurance for the borrower

In addition to the features mentioned above, education loans also offer tax benefits under section 80E of the Income Tax Act, 1961. The interest portion of your education loan EMIs are tax deductible for a period of 8 years from when you start repaying the loan.

2. Your wedding Sure, there are ways to have your wedding ceremonies completed within a tight budget of Rs. 50,000 or lower. But the Great Indian Wedding is on most people's wishlist. And if you count yourself among them, then it is essential to have a savings plan in place to fund this major life event.

In most cases, just like your education costs, your parents may shoulder the wedding expenses too. But for whatever reason, if you have to bear the costs yourself, here are some ideas to help you out.

Financial products to help you meet this life goal: Right from booking the wedding hall and arranging for food catering services to selecting the wedding trousseau and the jewellery, Indian weddings can be costly affairs. To pay for these costs, you will need a variety of financial products in your portfolio.

• Gold: Gold jewellery is an essential part of Indian weddings. So, investing in monthly gold schemes from top jewellers in the country or buying gold coins or bars can be a useful step towards this major life goal.
• SIPs in mutual funds: You can also invest small sums periodically in the mutual funds of your choice for a few years before the wedding. This way, you can benefit from market-linked returns without a major lump sum outlay.
• Wedding loan: If you have not set aside any other funds for your wedding, a wedding loan can be used as a last resort of sorts. Being an unsecured loan, this kind of borrowing typically carries a higher interest rate than other secured loans.
  

3. Having a baby Education – check. Wedding – check. That's two major life goals crossed off your wishlist.

Well, in most Indian families, the next major milestone is having a baby or two (or more, if you like a big family!). But babies come with their own financial obligations. Estimates suggest that the total costs of raising a child, from the time it is conceived till the time the child can take care of their own needs, can go up to Rs. 1.5 crores or higher.3

Apart from the two major financial expense heads in every child's life, namely education and wedding costs, there are also regular expenses that parents incur on an everyday basis. If you are planning to have a baby any time soon, you need to be financially prepared for these necessities.

Financial products to help you meet this life goal: To pay for your child's or children's needs and help them achieve their major life goals, you will need a diversified portfolio of different investment options. Here are some financial products that you can consider to secure your child's future and meet their financial needs.

• Child plans Child plans are life insurance plans that help you save up for specific milestones in your child's life, like their higher education, college or wedding. You can select a timeframe that aligns with these big life goals, so the payouts from the life insurance plan coincide with the expenses.
• Equity mutual funds To meet the major expenses involved in raising and nurturing a child, you don't just need a savings plan. You need to invest and create wealth over the long term. Equity mutual funds can help you do just this.
• Real estate or gold Real estate can offer a level of security to your child's future. Plus, in case you need to avail a secured loan to pay for any of the major life goals in your child's life, you can use the asset as collateral. As for gold, it is another ideal investment option to diversify your portfolio.
  
  

4. Any unexpected illness or injury The goals we saw up until now are all predictable and within your control. But then, there are some situations that you cannot really anticipate or foresee. For instance, a sudden illness or a medical emergency like an accidental injury can prove to be expensive to treat or manage.

In case you are not adequately prepared for these medical contingencies, you may have to either tap into your savings or take on more debt to pay for the costs. Timely and prudent financial planning can help you avoid these pitfalls.

Financial products to help you meet this life goal: Fortunately, there are many financial products that you can rely on to be better prepared for these emergencies. A health insurance plan is one such solution. It covers the costs of medical treatment, hospitalisation and more. Here are the top features and benefits of a typical health insurance plan in India.

• Health insurance plans may cover a variety of expenses like pre-hospitalisation and post-hospitalisation costs, ambulance expenses, room rent, diagnostic costs, surgical expenses etc.
• You can raise a cashless claim in case you visit a network hospital. Else, you can raise a reimbursement claim.
• You can also enhance the benefits using health insurance riders, in exchange for a nominal additional rider premium.
• You need to pay your premium regularly to continue enjoying the coverage and the benefits.
• The premium you pay for a health cover taken for yourself, your spouse or your child can be deducted from your income up to Rs. 25,000 per year (u/s 80D of the Income Tax Act, 1961).
• The premium you pay for a health cover taken for your parents is also tax deductible up to Rs. 25,000 each year. If your parent is a senior citizen, the limit is Rs. 50,000.
  
  

5. Changing homes or switching careers Moving homes or changing careers are not things you can plan for years in advance. You may have to move to a new home for emergency reasons, or, you may have to switch careers because your current line of work may not offer much scope for growth.

While these developments may not be common in everybody's life, it is always a good idea to be better prepared for them financially.

Financial products to help you meet this life goal: When it comes to planning for unexpected developments like these, an emergency fund is your best bet. Experts typically recommend that your emergency fund should be large enough to cover six months' worth of expenses. Alternatively, you can build an emergency fund that is equal to six months' worth of income too.

If your budget has the room for it, you can also build a larger fund for these contingencies. So, in case you face a temporary lull or dip in your income due to a job change, or you need to pay for moving houses, you can rely on this emergency corpus.

Your emergency fund needs to be liquid and easy to access. So, it's best to choose investment options that fit this criteria, such as –

• Fixed deposits
• A high-interest savings account
• Liquid funds or money market funds
• Physical gold
  
  

6. Black swan events Last on this list, but certainly not the least, is any black swan event that may sweep into your life unexpectedly. A black swan event is any development that is out of the ordinary and has severe consequences - like an earthquake, a flood, any other natural calamity, or even a pandemic!

Your finances may take a hit during such events, because there is no way to predict how the markets or any other asset will react during an unexpected development that has national or international impact. For instance, during the outbreak of the COVID-19 pandemic, the stock markets defied all odds and rose up, with the benchmarked indices setting new records.

So, in the midst of such uncertainty, what kind of investments should you choose? Well, your best bet is a diversified portfolio.

Financial products to help you meet this life goal: During black swan events like natural calamities or man-made disasters, a diversified portfolio is a good idea financially, since the losses in some assets may be absorbed or set off by the gains in others.

That said, a life insurance plan is an essential financial product to have in your portfolio during such unpredictable times. A life cover protects your family financially in case something untoward happens to you during unprecedented developments.

Term insurance, which is the most affordable kind of life cover, can make for a fine addition to your portfolio during such scenarios. Here is why a term plan can be useful.

• You get the benefit of a sizable life cover at affordable premiums.
• You can claim tax benefits on your premium payments up to Rs. 1.5 lakhs each year, as per section 80C of the Income Tax Act, 1961.
• With term insurance riders, you can even enhance the benefits you enjoy under the insurance plan.

Conclusion

So, these are some of the major life events and scenarios that you should be prepared for. While this is only a guideline, your financial planning needs to focus on the events and goals that you have on your wishlist. By aligning your investment and savings plan with your life goals, you can check them off as per the timeline you have in mind, without any undue financial burden whatsoever.