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Are You Accounting For These Expenses As You Bring Up Kids Today? - Outside View by PersonalFN

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Are You Accounting For These Expenses As You Bring Up Kids Today?
Jun 28, 2016

"Let's formulate a financial plan", agreed Mr Vivek Gupta (name changed), one of new client speaking with Prathamesh, a Certified Financial Guardian (CFG) who had been following up with him for some time to reiterate its importance.

This came after Mr Vivek experienced a rude shock when a medical emergency hit Sujata, his wife. He had deficient health insurance coverage and also didn't have much contingency reserve. So, he had to liquidate some of his mutual funds to make good the shortfall.

Mr Vivek always believed he had everything figured out, but he learnt a hard lesson on the importance of seeking professional guidance.

When Prathamesh sat down with Mr Vivek and sought data to draw a prudent financial plan, he quickly realised that Mr Vivek and Sujata, who fell in the Double Income One Kid (DIOK) category, had ignored to account for important ancillary expenses pertinent to child's future needs that made up a major chunk of his cash outflow.

They are settled in Mumbai, and were spending quite a handful on these ancillary expenses. And taking these into consideration was crucial to create a robust financial plan that resonated with their outlook towards money, and take the corrective course where need be. A quick look of the current expenses revealed:

  1. Day Care Expenses: They arranged for their child to attend a Day care facility. The facilities available at the day care included providing meals and assistance with homework. As you probably know, such facilities charge a hefty sum.
  2. Fancy Schooling: Their son Aryan went to an International Baccalaureate (IB) school that celebrated a number of events -Father's day, Mother's Day, Grandparent's Day, Environment Day, and many more in pomp and style and that seemed wanting on their pockets as parents, while they always aspired to provide the best education and mould their son's personality.
  3. Birthday Parties: As dotting parents, they threw lavish theme-based birthday parties for their only child and would contact event planners to help arrange it. The party was no longer cutting cakes, taking a gift and returning one! It had DJ, music, shutterbugs, buffet dinner, etc.
  4. Boys Toys: Aryan being exposed to an embellished environment played with toys that most couldn't hope to afford. The parents provided him all the gadgets he demanded as birthday gifts, which he used to flaunt with arrogance. On his upcoming birthday, he expects an electronic toy car costing Rs 25,000. And as matter of upbringing it was natural that he would demand even more in time to come.

On Prathamesh inquiring about these expenses, Sujata quipped that they wanted to offer their child the best. They did not want him to be "left behind". As a child, she wasn't able to live this life and envied her friends who did, and thus faced an inferiority complex.

Vivek, on the other hand, was a result of "peer pressure". He had bought a house in an upscale locality, drove fancy cars, and admitted Aryan to an IB school to match the lifestyle of their colleagues and society.

The high cash outflows were part of his struggle to meet these "expectations" and keep up with Joneses. "Log kya sochenge" (What would people think) was his defence, when probed about the cost of maintaining such a lifestyle.

But a detailed evaluation of their cash flows and investments revealed that they were well short of saving for life's important goals. Moreover, they had unknowingly got caught in debt trap, whereby they were living beyond their means.

In the beginning, Vivek and Sujata were in denial mode. They were shocked and perplexed to see their finances in red. They believed everything was sorted out. "This plan doesn't reflect our outlook or vision"; "You have accounted for a lot of ancillary expenses"; "We can easily afford this lifestyle" were some of their rebuttals.

After patiently addressing all their concerns, and getting them to come to terms with their financial situation, Prathamesh, the astute Certified Financial Guardian, suggested a step-by-step action plan to help the family get back on track. It was now up to them to decide-whether they could fix the problem or keep denying its existence.

Prathamesh's suggestions were a bitter pill for the Guptas to swallow, but deep down inside they knew change was needed.

Most individuals want to live a comfortable life. And in the pursuit (of happiness), they end up competing with a friend, neighbour, or role model. God I wish I could live like him, is what individuals secretly pray, forgetting the affordability question.

Most of us have ancillary expenses we believe are necessary. The objective of this article is to lead you, dear reader, to self-introspect and ask a vital question: "Can I really afford the lifestyle I have?" The objective isn't to judge what's right and what isn't. After all, it's your money and can be spent any way you wish.

However, it is always wise to seek professional advice early in one's life. It's your choice, make it count! Remember, every rupee saved, is a rupee earned.

We leave you with this wise quote from Will Smith, the famous American actor, "Too many people spend money they haven't earned, to buy things they don't want, to impress people they don't like".

PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.

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