The sudden shock

Over the last month many of us have had horrible, heart-wrenching stories of losses to share. In my immediate circle, I have had a relative, a batchmate, and a close business acquaintance pass away. In the wider circle, only bread-winning member, or even more sadly, both parents of young children passing away have led to many a sad moment. Some have spent many multiples of their annual incomes in treating the disease for themselves or their loved ones. Some have drawn down a large portion of their savings and have also come into debt. These lived experiences have made us all reflect on the importance of life, relationships, and family even more. They have also highlighted the importance of being financially prepared for shocks.

Every family and its situation is unique. What this article will do is to lay down some basic guidelines and signposts. The dictum that always holds in financial planning is “sweat in peace to avoid bleeding in war”. To the extent possible, many of these measures should be put in place even by those who have not been impacted directly.

A trusted advisor

Financial planning is a lot about conversations. As we will see, there is a need to think through on many issues – and different people in different situations will choose very differently. People have very different needs, and it is best not to pre-judge them. Also, the sums of monies have very different meaning based on their specific context: in some cases, Rs x can be comfortable lifetime of savings; in some cases, it would hardly pay down the debt. Conversations, done in gentle and measured manner by someone who is close to the family and who the family trusts, help bring out the various aspects that need to be considered when laying down a plan.

The most important advice is to find someone who you can trust. It is difficult, especially in the aftermath of a tragedy, to suddenly develop a relationship of trust. Hopefully there is someone close in the family or friend circle; hopefully you have built some relationships earlier. If not, do not take any decision in a hurry – take your time in understanding the nuances and in finding someone who you can trust.

Once you are stable, there are many threads and pieces to pick up on. Some of the jargon will be new and difficult, some of the paperwork hard. You will have to carry on. This is where the role of the advisor becomes critical.

Here is a five-step action plan that you should work towards:

  • Get all the paperwork in order
  • Get a sense of your net worth (assets minus liabilities)
  • Make your financial plan – version one
  • Build insurance cover
  • Keep the process iterative

Getting down to the details

  1. Get all the paperwork in order

This is easier said than done.

Putting together papers means getting a hold of at least these documents:

  • tax returns of the last few years – in all jurisdictions, if there are more than one,
  • list of assets owned – there will be “easy” lists like bank accounts, fixed deposits, equity and bond holdings in demat statements, mutual fund holdings, etc. and there will be “difficult” lists like ownership in house properties, partnerships, illiquid shares, etc.,
  • list of liabilities owed – here too there will be “easy” lists of loans from banks or financial institutions, credit card outstanding, immediate payables of expenses, etc. and there will be “difficult” to piece together liabilities like unsecured loans, cash advances, undocumented credit, etc.
  • nomination documents in assets and insurance so that transfer is easily effected,
  • insurance documents and claims – and filing for claims that arise,
  • any other relevant paperwork like wills that may exist, or understanding the rule of law that takes over if there is no will,
  • there may be some filing requirements with respect to citizenship, visas, etc. in case of families that live across countries,

A very important point that is often overlooked is the ability to get digital (or physical) access the asset even after ownership (by say, getting the log-in ids and passwords, etc.) This may involve working with banks and other financial institutions to get this in place. Again, a trusted person who can devote some time will be very useful here. If possible, develop a system where digital access to assets is easily available to the next-of-kin, or in the case of emergencies, to the near ones in the family.

  • Get a sense of your net worth (assets minus liabilities)

Once the above is ready (and do not worry, it can take some time to put in place), it is important to list down the assets and liabilities at current market values.

Once this list is created, important conversations need to be initiated with the various relevant members of the family. Some questions that may come up: (a) is there any inheritance for the surviving members, (b) can that be advanced/tied down/committed, (c) what are the long-term plans of care for the bereaved household by the extended family, etc. This will help get a sense of how well placed (or precarious) the financial situation is. These conversations are not easy and can get emotionally charged – they may not happen in as methodological manner as described here. However, one will still need to work towards this and get a good handle on some of these questions, even as some answers may evolve over time.

With a reasonable sense on the assets, liabilities and family support, conversation now needs to account for what assets should be kept and which ones can be used to pay off the liabilities. Getting a workable plan for arriving at a sustainable liability and a net asset situation is important to get stability in future dealings. If the situation is delicate here, further rounds of conversations with family and friends may be required.

Executing on the sale of assets and paying down of the liabilities needs to be done with dedication. As with all matters in finance, it is easy to let things drag – some of these things are not easy or pleasant to do. However, building a stable plan may require taking some hard decisions.

Sometimes one may need to maintain a significant amount of liquid assets (cash, bank balances, etc.) simply to tide over any other emergency because of recurrence of a disease within the family, dealing with sudden changes which require constant change of plans, etc. One must be conscious that liquid assets do not mean that they should be spent away also quickly – this corpus will be very useful in dealing with sudden changes in life. 

  • Make your financial plan – version one

Now starts the actual discussion on financial planning.

Financial independence is simply a matter of present value of assets is greater than or equal to present value of liabilities. In simple language, this means that financial independence is achieved when what you have is more than (or at least equal to) what you expect to spend. Most of us tether somewhere around the verge of equality – which means that any sudden shock can create an imbalance. In many cases, the value of assets is less than value of liabilities – this is what makes us continue to work in our jobs or businesses.

Having put this basic point here, it will be useful to get a sense of the assets and liabilities. I am listing down a few types of assets and liabilities – this list is, by no means, exhaustive; it is only illustrative so that you can begin to think about this in a structured manner.

Assets: This is largely the sum of:

  • The current net assets that we calculated above,
  • Any income stream from work that members in the household will do,
  • Any inheritance or insurance payout that may come their way in the future.

Liabilities: This is largely the sum of:

  • Any goals that the family members may have (moving to a new city, house, vehicle, etc.)
  • The sums to be spent on the education of the child(ren) – be careful, this is not just about the school fees, there is much more (tuitions, digital learning, extra books, uniforms, transport),
  • Other costs of raising the child(ren) and how long do you plan to support them,
  • Any other large expenditure that may come by (medical issues in the family, etc.),
  • Travel (while this does not immediately seem obvious, trips for vacation, pilgrimage, family, education, etc. will start again)
  • A reasonable corpus for retirement

I have also made the description easier by talking about assets and liabilities across time in one list – a financial planner will use sophisticated tools of calculations (present value, risk-adjusted returns, discounting rates, etc.) to make a plan. While you should let the expert do the technical work in detail and precision, having a broad sense of what is going on will be useful and allow you to get in command of the situation.

Estimating the details of each of the above requires tact, science, and art. This is where again a trusted person is very helpful. These conversations are best paced after the paperwork is done. This allows more information to emerge and things to become clearer in life. Many decisions will end up being taken because of the new circumstance – you may move to your hometown, work may take you to new locations, life choices of children (education, work, etc.) may define your choice of location and housing, etc. Of course, none of these are cast in stone and hence the planner/friend will have to revisit this again after a few years.

Also, there is no “good” or one number to come to for assets and liabilities. Typically, income streams are riskier, especially if they are related to a job in middle/later years and have some growth component built in. The liabilities almost always tend to be underestimated and often missed. As life circumstances change, the composition of liabilities may also change, for example, you may choose a different type or duration of schooling for children, or parents or family may offer shelter allowing the current house to be sold to pay down liabilities, etc. As you find your financial standing back over time, you may again revisit some of these choices.

  • Build insurance cover

It is critical that the life insurance of the surviving persons in the family is adequate. For life insurance, there is a “simple way” of calculating the amount that must be considered (given the ability to afford premiums, etc.): the amount must to be equal or more than the amount of current and future net liabilities that you have.

Your insurance should ideally be enough to cover the excess of your liabilities over your assets. Do not let the numbers frighten you – work with an advisor who can help you with the maths. Insurance can be a complicated product to understand for the best of us – this is again a reason to have a trusted and competent advisor by your side.

An important concern may be that given the stage of life or the income stream of the surviving person, the insurance companies may not give as high an insurance cover immediately. Insurance companies typically offer insurance as a multiple of your income – this may not be equal to your needs as you calculated above but this is the current reality that you need to live with. Remember these calculations and get to work towards this target number over the next few years.

The surviving family member needs to have a reasonable medical (health) policy for the family – hopefully this coverage also comes in via an employer. In any case, it is best that an independent medial policy is taken as soon as practical.

  • Keep the process iterative

As one proceeds in these discussions, it is obvious that these conversations will be iterative. Once the family starts to get a sense of the numbers, many decisions above get considered and reconsidered. There are many ideas which appear outrageous at first will start to make a lot more sense once they are re-evaluated with more information and a cool mind. These could include moving to new cities, selling down ancestral properties, changing careers, etc.

This process requires a lot of hand holding and support – both emotional and intellectual. Decisions taken in this phase will shape the life of all family members. The role of a trusted friend and guide cannot be over emphasized in this process. In many cases, this friend will act not just as a sounding board but also as someone who may help you in times of distress. Having a broad knowledge of your situation resident with a friend can be very helpful in times of a crisis.

Start now

If you have not thought about these aspects, take some time out to review your paperwork, plan, and relationships. More important, if you have not had discussions with your family about some of these issues, this may be the time to start having some conversations. You can do this unaided and on your own. If you need help, work with a professional financial planner – develop trust and comfort as they will need to know many of your intimate details and plans.

These conversations will help you see your life and goals more clearly – and prepare you and your family in case of any sudden emergency.

Views are personal.

This article was written in the context of a family of a friend in early 40s who passed away suddenly in the second Covid wave. This planning document was written to bring together an emphasis on balancing the long-term needs of the family with the immediate short-term requirement. After it was circulated in a small group, there were requests for making this more widely available.

I have some expertise in writing on a topic like this having cleared the challenge status of the Certified Financial Planner (CFP) certification in 2007 when I was running a financial planning company, PARK Financial Advisors, that I had co-founded. Many aspects of financial planning are timeless – for specific advice, you must consult a financial planner whose judgment and integrity you trust.

This article is not financial advice – these are broad directions of how to think about your life and finances. Do refer to a professional for advice that is suitable in your unique context.

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