In the previous article we discussed challenges encountered by families with individuals who have special needs. To put one’s mind to rest regarding concerns of the future, and fears about financial independence of your child, careful and mindful financial planning is the way to go. With proper guidance from trained financial advisors financial planning ceases to remain one of the challenges families need to worry about.
To simplify, financial planning is a process and not a tangible product to buy. The benefit of this approach is that it helps families in identifying pitfalls that may appear along the path towards a child’s future financial security. By implementing effective strategies one can bridge these pitfalls and manage finances well. Moreover, financial planning is a dynamic process that accommodates changes that come along in life during its course. This helps families in staying on course for reaching the objectives that have been penned down for the family’s welfare.
Please focus on the 3-step approach to financial planning which families may adopt to plan for their child’s future:
ESTABLISH AND PRIORITIZE LIFE GOALS
Identifying life goals may be easy but prioritizing them is sometimes difficult. A simpler way is to divide these goals into categories that address their longevity, into SHORT, MEDIUM and LONG term goals. The short term goals may include vacation or buying a car over the next 2-3 years. The medium term goals may focus more on the child’s education or buying a house, say after 4-6 years. Any goals beyond that may be listed under long term goals. Finances (for 2-3years) that cater to your child’s requirements may be listed under short term goals. Similarly, expenses of child for the next 5-7 years may be included under medium term goals and planning for expenses during the parent(s)’s retirement can feature as a chief long term goal.
DETERMINING CURRENT FINANCIAL SITUATION
Parents must ask themselves two questions -
What existing resources do we have?
Are these resources enough to provide for our child’s care, and for our own selves?
These questions may be answered by effectively analyzing the family’s current financial situation.
This analysis assesses 2 parts- Net worth and Cash Flow.
The NET WORTH part of the finances gives you an estimation of financial self-worth/value. Net worth is computed through a DIFFERENCE BETWEEN YOUR ASSET AND YOUR LIABILITIES. The assets are what you own till date (your house, car, investments like mutual funds, PPF, personal savings) and liabilities (loans or liabilities) are what you owe to a third party. The difference of the two would give you your net worth.
The other aspect of your financial analysis is the CASH FLOW. This tells you the nature and extent of savings you are able to generate, which will become the main source of funding for your child’s care. Cash flow has 2 components- Income and Expenses -
INCOME - Income may be from different sources and includes the parent(s)’s earnings (salary), government support (pension for the disabled), and income from investments, any inheritance from grandparents or other relatives. All sources of income must be identified clearly.
EXPENSES – A separate calculation of expenses of a child with special needs must be done to assess the overall financial requirements of the child. It would thus be beneficial to draw up two separate expense sheets – one that details family expenses and the other that itemizes the child’s daily living expenses.The family expenses may be broken down into fixed and variable expenses.
Fixed expenses are those which are known to you and generally do not vary, like your household rent, utility bills, insurance premiums etc. On other hand, variable expenses will cover those expenses which you do not estimate or set aside each month, such as local or non-local travels, personal shopping etc.
The child’s expenses will include cost of therapies, schooling, transportation, vocational trainings and everyday living expenses. Sometimes it’s hard to estimate this, especially when you are doing it for first time. Do not feel overwhelmed, and continue to monitor them for few months and draw up an estimation of these expenses.
IDENTIFY PITFALLS IN THE PLANNING PROCESS
Once you are aware of your family’s finance requirements, you will be able to appropriately judge any gaps along the way. You may be high on expenses and low on income, thus not effectively generating enough surpluses. Another scenario is that you are on the verge of retirement but the corpus accumulated may not be enough. Whatever the situation, this analysis will give you a clear picture of your preparation for your child’s financial care. You can then take effective measures and build strategies to create a secure future for your child.
DISCLAIMER: Please note that this guide is for information purposes only. Please consult a financial advisor for any legal consulations or advise pertaining to your needs.