Provide for liabilities and contingency; avoid dipping into goal-linked savings.
Vikrant Joshi, 31, a public relations executive, decided to pursue higher studies in 2009. It was already 2008 and he had to provide for his liabilities, a home loan (equated monthly instalment or EMI at Rs 5,000) and household expenses. Left with little option, he started saving immediately.
The key to planning for mid-career breaks lies in creating a ‘sabbatical corpus’ that would compensate for the dip in income, at least a year before making the move. Evaluate your liquidity (bank balance and income inflow, if any expected), monthly expenses and other cash requirement. Accordingly, determine the amount required for the break. Joshi set aside Rs 15,000 a month for a year to build a corpus of Rs 1.8 lakh for his parents while he was away.
Since most individuals plan for breaks mostly a year or two before, the focus should be on capital protection. Amar Pandit, CEO, My Financial Advisor, advises parking the sabbatical corpus in debt instruments (fixed deposits/debt mutual funds) due to the goal's immediacy. Monthly expenses can be transferred to your dependents via a systematic withdrawal plan.
Liquidate investments only if there is a shortfall. Recalls Malhar Majumder, a Kolkata-based financial planner, "A senior banker wanted to take a two-year break to pursue his post-doctoral studies abroad. He was getting a generous scholarship but he had to provide for his wife (a homemaker) and son." In spite of mapping the family's monthly monetary need and investing it in debt funds, there was a shortfall. The banker had to liquidate his land holding. He started planning two years in advance.
Planning ahead of time is preferable because some investments may not be very liquid and cashing out of these may take time. For instance, Majumder's client started scouting for buyers for his real estate investment over six to seven months in advance, given the illiquid nature of the asset.
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Financial planners suggest liquidating equity investments in the same way. Liquidate these in tranches over one-two years to benefit from different market levels.
Early planning also gives leeway in investing via high growth instruments like equity and amassing a bigger corpus. Normally, equities return an average of 12 per cent annually. While you can liquidate investments, avoid dipping into those linked to short-term goals. Breaking those meant for long-term goals like retirement can be replenished, as you are likely to have time.
Of course, this may not be as strictly applicable for the likes of former management consultant, Gayatri Nair Lobo, 32,who joined Teach for India (TFI) in October 2009. She had to accept a 30 per cent pay cut. Luckily, she comes from a dual-income household and has no dependents; so, she could go easy on sabbatical planning. She had planned to work with TFI for a year but is now completing her second. As plans may change midway, contingency planning is vital.
Typically, those pursuing higher education can hope to earn higher salaries on resuming work and compensating for the years lost. However, this may not always be true. As an academician, Joshi earned around Rs 7 lakh annually. After changing his profession, he saw only a 15 per cent rise on course completion. His liabilities have gone up correspondingly, as he is repaying an education loan as well (EMI of Rs 30,000). Also, he planned to get married a year after the course and there was an urgency to save for it. So, he has not been able to plan for any future goal(s). His has a couple of endowment policies (premium of Rs 70,000 yearly), primarily for tax-saving.
The likes of Lobo, who plan a break and may not see a significant jump in salary on return, must maintain a tight leash on expenses, curtailing discretionary ones and divert all savings towards financial goals.