Ask a B-school aspirant, ‘Who will pay for your education?’ In most cases, the answer will be ‘My parents, who else?’ It’s also likely that parents will foot the wedding bills of their 30-something children. Unlike in the West where people become independent as soon as they cross their teens, Indians never stop de pending on their parents. It is assumed that parents are duty bound to fund all the needs of their children even if it is at the cost of their own requirements.
A survey by HSBC shows that one out of every two retirees is funding his children’s needs (see graphic). In fact, 44% of the retirees who had not saved enough gave this as a reason for the shortfall. “Funding dependants in retirement is more common in India than the global average, with 52% funding their children even though they have retired,” notes the study.
So deeply ingrained is this attitude that parents consider themselves failures if they are not able to pay for their kids’ higher education, marriage and homes. “Children seldom think of financing their own needs. Only in rare cir cumstances, if parents are low-income earners do children look for alternate sources to achieve their goals,” says Sumeet Vaid, founder, Ffree dom Financial Planners.
But this overburdening can wear out parents financially, especially those who belong to the sandwich generation. Such parents not only have to take care of their children’s needs, but also of their own parents, who typically have no source of income and depend entirely on them. Our story tells you how to lessen the financial burden for your parents by saving and investing for your goals on your own. It will act as a breather for your parents, who can focus on their retirement planning by not having to save for you. Here are some tips that will not only ease your parents’ load but also make you financially independent.
Take an education loan
Till about a decade ago, school fees and related costs were within manageable limits. Now, however, studying in a public school can skew the household budget. An Assocham study says that the average annual cost of a schoolgoing child has risen almost three-fold from 34,000 in 2005 to 94,000 in 2011. According to an ET Wealth estimate, urban middle class parents spend close to 55 lakh on raising a child from cradle to college, and education expenses account for nearly 45% of the total cost.
If they have already spent so much on your education, is it fair to expect your parents to arrange funds for your higher education? In stead, you can opt for a loan with your parent as a co-borrower. You can typically take a loan of up to 10 lakh for studying in India and up to 20 lakh for studying abroad. The interest rates on education loans range from 10% to 18%, depending on the bank and the type of course applied for. The good part is that the interest you pay on the loan is fully tax deduct ible, so your effective rate of borrowing comes down. The tax breaks are available for up to eight financial years.
Student loans are quite comprehensive as they typically cover costs of admission, tuition boarding and books. You can start repaying the loan after you get a job or after six months of completing the course, whichever is earlier However, do remember that if you don’t get a job or default on the payment, your parent, who is the co-borrower, will have to repay the loan.
Start saving and investing
The biggest thrill of earning money is the financial independence that comes with it. You don’t need permission from anybody before buying that slick new smartphone or that expensive dress you have been eyeing for weeks Instead, you just swipe that small piece of plas tic in your purse and purchase it. Would it not be great if you could extend this independence to larger items, such as funding your wedding or buying a house? Yes, it is difficult to build a corpus that runs into lakhs of rupees when you barely make 30,000 a month.
However, large corpuses are not built in a day. It requires discipline and patience. If you diligently invest a portion of your income every month, you can build a sizeable portfolio in a few years. For example, even a modest in vestment of 3,000 a month in a plan that grows at 12% annually would grow to 2.18 lakh in three years. In five years, it would grow to 4.12 lakh. Mumbai-based Akash Bhatia has learnt the art of investing even before he has started earning. “I started by investing a portion of my pocket money in stocks. Though I made a few mistakes, today I am sitting pretty on a corpus of 2.5 lakh,” says the 22-year-old MBA student who has been investing steadily for the past four years. In fact he was able to pay his course fee of 1 lakh from his own investments.
However, experts believe that stocks are not the best investment option for newbie investors “You can start with a recurring deposit and then move to mutual funds through the SIP route. Ideally, direct equity investment is for someone who has the time to devote to indepth research and analysis,” says certified financial planner Jayant Pai. If you haven’t started earning and your pocket money is too low, consider taking up a part-time job. It will not only help you earn some money but you will gain practical experience, which could prove invaluable in your career.
Share household expenses
If you are living with your parents, it’s only fair that you contribute to the household expenses Your parents may not ask you to contribute and even dissuade you from doing so, but given that they are close to retirement, you should shoulder a significant burden of the monthly household expense. Remember, if you allow your parents to save more for their retirement, it will lessen your own burden when they stop working.
Paying rent to your parents is perhaps the most tax-efficient way of contributing to the expenses. If your employer offers you a house rent allowance as part of your compensation you can claim exemption for the rent paid. How ever, this is possible only if the property is reg istered in the name of your parent. The owner will be taxed for the rental income after a 30% deduction. So, if you pay your father a rent of 3 lakh a year ( 25,000 a month), he will be taxed for only 2.1 lakh.
It gets better if the property is jointly owned by both parents. Then you can divide the rent between them so that the tax liability is split between them. If their income exceeds the basic exemption limit, you can help them save tax by investing in their name under Section 80C op tions, such as the Senior Citizens’ Saving Scheme, five-year bank fixed deposits or tax saving equity mutual funds.
Pune-based IT professional Satyam Chawla lives in his father’s house and pays him rent while his own residence has been rented out “In this manner, not only is my father finan cially independent, but I can take care of him as well,” he says.
Some parents may not agree to take money from their children. So, the helping hand will have to be subtle. Buy health insurance for them which is a real need for people heading for retire ment. It also helps you save tax. Up to 15,000 paid as premium for the health insurance of parents can be claimed as a deduction under Section 80D. If any of the parent is a senior citizen, the deduction is higher at 20,000. This is over and above the 15,000 deduction for your own family. Also, this deduction is available ir respective of whether parents are financially dependent on the taxpayer or not.
Be open to reverse mortgage
If your parents are asset-rich but cash-poor, re verse mortgage can unlock the value of their property. In such an option, the bank pays a monthly amount to the owner of the house. With each payment, the bank’s ownership of the prop erty increases. After the death of the owner, his legal heirs can either repay the loan, along with the interest, or let the bank sell the property. The bank deducts the borrowed amount from the sale proceeds and give the balance to the heirs The option of reverse mortgage is only available to senior citizens and they should be living in the house.
Reverse mortgage is a good way of earning an income by unlocking the value of real estate without selling it. But many youngsters oppose any such move by their parents because it im poses a liability on them. They don’t realise that the property is not being sold but is only par tially mortgaged. Even if the parents take a monthly income of 20,000 from the bank, it will take them 4-5 years to rack up a loan of about 12 lakh. However, it will allow the parents to live a life of dignity and financial freedom.
Be open to the idea of reverse mortgage and explain the concept to your parents. A small tip it’s good to involve all the stakeholders in such discussions lest a sibling feels that you are try ing to sell the property.
The four biggest expenses for parents & how you can help.
Your education
You can jointly take an education loan for your higher studies and repay it after you start earning.
Your wedding
Both partners can save for this goal. You can also take a personal loan so that your parents are not burdened.
Buying a house
You can be a co-borrower if they take a loan or pay them rent if you stay with them. This gets you tax benefits as well.
Their retirement
While parents may not expect the children to fund their retirement, you can take health insurance for them. This also attracts a tax benefit.
Author: Sakina Babwani
Image courtesy:©Thinkstock photos/ Getty images
