Personal finance pitfalls young mothers face
Everything did not work out to plan, she began. This reader has a two-year-old baby for whom she decided to take a career break. She had planned to return to work after the child was old enough to go to play school. She now wants to return to work, but finds herself staring at recessionary trends that have shrunk jobs across sectors. How does one protect from economic cycles, she asks. Personal finance columns such as this one that steer clear of numbers and try to paint conceptual pictures invite a persistent criticism that they lack in action points. In reality, the learning path of each person evolves based on the problems they have solved to their satisfaction and the experiences they have gathered while doing so. Personal finance solutions might have generalised an issue somewhat, and with reason!
If one takes a simple task list perspective of my reader’s problem, one would ask if her career break plan considered this risk of recession. The clinical view is that she must estimate her expenses for the period she would be without work. Then she must build a corpus that funds that period, from her earnings. And she must invest it such that it generates the income she needs while she stays away from work. Why would this be difficult to implement? There are at least three reasons why. First, a young earner typically cannot fit all the expenses into their income, given their need for incurring large ticket expenses in the early years.
Second, there is not enough time to build a large corpus and use it as a buffer. One cannot realistically earn for 10 years, and create a buffer for 5 years, with the savings of that period. Third, though they may be willing to risk the corpus with growth investments like equity, they may be unable to do so given a shorter investing horizon. Unless they get lucky, they might have to settle for a bond-like rate of growth in the corpus. The possibility that the period for which they plan to be out of work gets extended longer than planned, is a risk that won’t be covered by these real life constraints.
In reality, many young earners have focussed on building an emergency fund or a saving stash that would see them through a period of being between jobs. They are at best able to extend that a bit while planning a break for the child. Therefore, what they have is not a corpus, but a saved surplus. Then they also run the risk of underestimating the increased expenses after the child is born.
Young mothers left their children in day care and chose to return to work after their paid maternity leave, primarily due to these reasons. But those were old times, my reader argued. Cold financial logic ordained that choice for many women of that generation, even if it weren’t ideal. We live in modern times when jobs are easily changed and young earners confidently quit and find new jobs for their given skill sets. What hasn’t changed is that child bearing sets the woman back a few steps. Without support that helps manage the child, it continues to remain tough to return to work. We haven’t done enough to recognise the economic contribution that women make to the world, and help organise their work and life in a manner that enables this for a young mother. Therefore, solutions that individuals seeks within their own contexts turn out to be sub-optimal as has happened with my reader. As with almost any personal finance problem the stability of flow in income draws from the adequacy of the stock of wealth.
The funding of a career break is not just the math of how many months of unemployment the accumulated savings can fund. One does not forecast economic cycles, nor does one hone the skills to predict when a downturn ends. These exercises are hugely romanticised but unpredictably wrong in their outcomes. No one can see the future clearly. The resilience to a downturn in an economic cycle is what one focuses on: Are there incomes that substitute hers for an extended period? Are their stores of wealth that can be accessed if reemployment gets delayed? These are more important than the math of adequate corpus for a fixed number of years in break.
First, the household should be able to manage with the single income until she can go back to work. Many manage with a controlled spending of the single income until the new mother can return to work. Women who take extended career breaks enjoy the support of the spouse who earns adequately to cover for the other. Career breaks have become easier in modern times from an overall increase in the earning levels of families. That is a feature of the resilience of household income. Both parents recognise and realistically evaluate this resilience.
Second, the household should have some stores of wealth that can be accessed in a situation like an economic downturn. Locking wealth up in the ownership of property has hurt many young households immensely. This reader has an inheritance from her parents that would be available after their times. A potential source of huge wealth only timed wrongly given her current situation. Every stock of wealth is valuable in a downturn, because jobs and income won’t materialise in a recession. One must access them with the hope of building back when the economy turns again.
My reader told me she is hesitant to ask her parents and it makes her feel squeamish about sounding entitled. I asked her if her parents had other plans for that wealth. Would drawing on it now interfere with their well being and lifestyle? No, she is their only daughter and the only inheritor of a fairly large chunk of wealth built over the years. Does she or her parents plan to give it away to charity, I asked. She was shocked at the suggestion.
If it is yours to utilise and benefit from, why not access it when you need it the most, I asked. We hit that cultural block. She felt most hesitant to ask. But promised to give it a thought. Most times personal finance problems simplify themselves into issues of income, wealth and the timeline. We suffer because we don’t see them like that.
(The author is CHAIRPERSON, CENTRE FOR INVESTMENT EDUCATION AND LEARNING.)
(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)
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