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Single income? Here's how to manage
Poornima Kavlekar, Outlook Money | December 31, 2008
Jaya Narayan, 33, had a high-flying career as a HR professional. But, at some point, she felt the long hours and regular travel were keeping her away from her two-year-old son. Finally, she decided to give up her job.
The family now depends on the salary of her husband Rajeev Ramani, who works as a senior principal application engineer with a multinational IT company.
For Sridhar Venugopal, 45, a PhD was always on the agenda. So, in January 2006, he quit his job with Mascon Global [Get Quote], an IT firm, and first worked on his post-graduation in software enterprise management from IIM, Bangalore.
Before beginning work on his doctorate at IIM-B in June 2007, he spent a year setting up his consultancy. Today, between his wife Chitra's income from her Montessori school, his doctorate stipend and consultancy fees, they meet all their expenses, including the schooling of their two sons, 16 and 14.
Giving up an income is never easy. However, if foreseeable reasons -- a new-born, an ailing parent, higher studies or taking care of growing children -- enforce such a decision, it should have the cushion of planning. Be it a stop-gap measure or a long-term step, planning for the situation empowers not only the principal, but also those dependent on that income.
Says Sridhar: "Since I knew I would need a study-break, I refrained from risks. I have been extra conservative with my lifestyle over the last six years or so. I kept my financial commitments, expenses and expectations minimal. We were transparent about our financial situation in front of the children as well."
With that kind of clarity, the path ahead becomes much easier.
Before giving up an income: Prepare a sabbatical corpus. This is the fund that will supplement the single income when one earner goes on a break. Before giving up his job as a key account manager with Mercedes-Benz Research and Development India in April 2007, Bharath Chandrasekaran, 31, took a deep, hard look at his family and finances.
"I had worked for eight years, two of them in Germany, and had my pot of savings. My wife Devaki, who is into information systems, had also worked for six years and was earning a decent sum. The situation was ideal to get an MBA," he says.
Plan the cash-flow for at least the next six months, says Lovaii Navlakhi, managing director and chief financial planner, International Money Matters. This will help carry on your present lifestyle till you settle into a new routine.
Build an emergency fund and maintain it at all times. When Rathi Varadarajan, who ran The Next Shop, a chain of lifestyle stores, decided to wind up the 15-year-old business in June 2008, she made certain there was a sum put away. "We were sure of being able to manage on my husband's income, but it does help to know there are back-up funds," she says.
Think about alternatives. So you're giving up the salary that comes with a full-time job. That's no reason to live without an income. Consider part-time jobs or consultancies, which will allow you to meet your domestic or educational responsibilities.
Kamini Rajesh, 35, who gave up her job for the second time in two years in 2007, latest as senior manager with ICICI Bank [Get Quote], to take care of her ailing mother and her children, took up assignments as a soft skill trainer. It wasn't her core competence, but the 13 years she had spent in the telecom and banking industry that gave Kamini the confidence to branch out to fulfil a market need.
Her earnings allow her to pay Rs 10,000 every month towards a personal loan.
It's also advisable, says Navlakhi, "to leave your work place on good terms, with friends and not enemies, and keep an option open to return there".
Plan what to do with your time. Whether it's care-giving for a parent, or bringing up kids, or even studying for an exam, if you plan to return to a career, use the time away to gain relevant skills and improve competencies. Jaya says: "As long as people keep themselves relevant, they will be absorbed back at least in their last position. The promotion to the next higher level should happen quickly enough. They may find themselves a bit behind their peers, but it's a matter of time before they catch up."
Healthcare. Healthcare is one of the most important expenses that a family must be able to foot. Many employers offer health cover for the whole family. Before quitting your job, ensure you have independent policies to make up for the cover you lose.
Sridhar, who had medical insurance with his last employer, was fortunate that IIM-B offered the same facility to those enrolled in their Fellow Program in Management (equivalent to PhD). Even before she gave up her full-time job, Jaya took health cover.
Debt. If there are liabilities in the form of monthly instalments (EMIs), pay them off first -- or, at least, a substantial portion.
For the remainder, ensure that you do not default. Before resigning from his job, Sridhar, for instance, prepaid Rs 5 lakh (Rs 500,000) towards his housing loan principal, while keeping the EMI steady at Rs 18,000. The pre-payment brought down his loan tenure and the principal amount.
Mumbai-based financial planner Gaurav Mashruwala, says, "Before giving up one income, it is better to get out of the loan. If that's not possible, reconsider giving up one income."
Swapnil Pawar, director, Park Financial Advisors, offers another option: "EMIs should account for less than 40 per cent of the single income. Prepay the costliest loans first (in order: personal loans, car loans and home loans).
Families should also check the level of non-discretionary spending (that is: rent, household, domestic help) and bring these expenses, plus all EMIs, to less than 60 per cent of single income."
Long-term goals. Do not compromise on goals like retirement and children's education. Sridhar, whose two boys are in classes XI and VIII, is clear that their schooling was never endangered. He says, "We contribute annually to their PPF account, which we opened when they were young, for their education needs."
Savings. Understand how much you can save on a single income. For this one needs a good grip over current expenses.
"If the savings rate is any lower than 20 per cent, move to reduce the discretionary expenses first. If the savings rate is above 20 per cent, selectively reduce some high-ticket items from the discretionary spend if you do not foresee any major increase in the single income in the near future," says Pawar.
Adds Navlakhi, "A basic financial plan, which marks your important goals and amounts, will help you in determining how much you will need to save on a monthly basis."
For Jaya, who earned as much as her husband, the impact has been the most on their savings. Any new expenses they incur will further affect their current outflow, which includes a housing loan EMI of Rs 22,000.
It is normal to go through pangs of uncertainty when you move from double to single income. But a prudent outlook, proper planning and disciplined spending will help immensely. This transition is not something you get used to overnight. Give yourself time to fit into the new patterns and other changes.
Tightening the belt
There are strong chances of returning to the job market with a higher salary if one takes a career break for personal enhancement.
Only educational costs would have to be borne in the self-help period. The spending pattern will need a revision if it is not possible to generate a source of income in the foreseeable future.
Look for ways to save under various heads: babycare/creche costs, commuting expenses, wardrobe outlay. The key theme is prudent money management. A few tips:
1. Look at the discretionary expenses first. "The double income offers a fairly high savings rate which creates a sense of 'we don't need to budget'," says Swapnil Pawar, director, Park Financial Advisors. "It's very important to overcome this attitude while moving to a single income."
2. Cut down on eating out, impulse shopping and expensive holidays. If you use credit cards, stay within credit limits and pay before due date. Or opt for a debit card.
3. Still can't cope? Prune the mandatory expenses, including domestic help and rent. Consider moving in with your parents or in-laws. Or firing the driver.
4. Finally, the long term costs. These include insurance and housing EMIs. Any changes in these spell trouble. If your decisions begin impacting the future drastically, it may be time to get back to full-time work.
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