Express Clinic

Profession: Associate with a KPO

annual income

Rs 5.40 lakh

Status amp; goals

Nisha is from Darjeeling but works and resides in Gurgaon along with her mother. Her father who was a government officer passed away last year. Her mother gets family pension and is covered under the family health insurance scheme of the government. She wants to take care of her mother and thus has no plans for marriage as yet. With all her savings she wants to give her mother a secure future. She considers herself secure under the benefits provided by her employer but is looking for a structured financial planning that could help her achieve her near-term goals

Needed

Nishas basic goal is to buy a house in the coming year,take good care of her mother and plan for a secured retirement.

Net monthly surplus

Rs 5,000

Current Investments:

Bank fixed deposit Rs 2.50 lakh

PPF savings Rs 780 per month

EPF savings Rs 780 per month

Land in hometown Rs 35 lakh

ULIP investment

FINDINGS

Emergency fund: Liquidity available in fixed deposits can take care of emergency requirement.

Life insurance: She has one life insurance policy of Rs 2 lakh sum assured which is unit linked.

Health Insurance: She has health insurance coverage of Rs 3 lakh through employer and her mother is covered under government sponsored policy.

Investments: She has no idea how and where to allocate her resources for investments,thus whatever she has is in fixed deposit or compulsory savings like EPF.

Liabilities: She has a car loan and a personal loan,which will be paid off by next year.

Recommendations

Emergency fund: Nisha needs to break her FD and put Rs 1.20 lakh in her savings account or a flexible FD account and maintain it as an emergency fund.

Express tip: Emergency fund helps in managing crisis situation. When everything is going smoothly one never thinks about such situations but its advisable to be prepared for the worst.

Life Insurance: Nisha does not have much of life insurance coverage. Life insurance is meant for those who have financial dependents. Nisha has to see the dependency of mother. If that is getting managed by fathers family pension,than nisha does not need a life insurance policy,otherwise she should go with a cover of at least Rs 50 lakh. Online term plan would cost her Rs 6,000 p.a.

Express tip: Life insurance is required only when there are financial dependents. Otherwise theres no need to pay mortality cost. Better to invest your money somewhere for good returns.

Health Insurance: Nisha should not be dependent on her employer for her health insurance requirement. She should buy a separate individual health cover of at least Rs 5 lakh. This will cost her Rs 6,000 p.a.

Express tip: Health is a very sensitive issue. One health problem has the capacity to devour all the savings. So better be prepared.

Accident Insurance: Accident coverage is meant to cover the income loss due to disability which may be temporary or permanent. This is one of the most important insurance coverage. Nisha should buy an accidental cover with temporary total disablement benefit. The sum assured of Rs 50 lakh will cost her about Rs 6,000 p.a.

Express tip: Like bad health,disability can also prove to be very bad for your finances. Better to cover that risk at the earliest.

House purchase goal 2014:

It is very much visible that Nisha does not have enough savings and neither has she had enough cash flow surpluses which could finance her goal of buying a house. But next year,after doing away with her car and personal loans she should be able to generate monthly surplus of around Rs 25,000 per month. With this much of surplus she would be able to buy a house in the range of Rs 30-Rs 32 lakh. In this case also she would have to arrange for at least 20 per cent of house value as down payment. Looking at the situation,she has two options. One is to sell the land she has in her home town to partly fund the house purchase. The second option is to start saving Rs 25,000 per month in some short-term debt funds and review the situation after one year. This way she can save decent corpus for the down payment of house loan. Use the balance in FD and ULIP towards this goal.

Loan interest rate assumed 10 and loan tenure 20 years.

Express tip: Going with high interest loans like personal and car loan at a young age,leaves very less scope to arrange finances for other important goals. Save first and then buy.

Retirement Planning 2039:

Nisha wants to remain independent always but also understand that come what may she has to stop working sometime,so she needs to plan properly for those days. She wants to retire at the age of 55. Her EPF and PPF contribution will yield her around Rs 25 lakh and the balance she needs to accumulate herself. Now,to accumulate the balance Rs 3.90 crore,she needs to invest Rs 15,500 per month in equity debt asset allocation of 80:20. Right now,it may not be possible but here she has to prioritise between house and retirement.

Rate of return assumed is 14 post tax in equity and 8 post tax in debt.

Express tip: Retirement goal is always related with current expenses,which designs a persons lifestyle. Higher the expense,higher will be the corpus required and which requires higher savings too. EPF has always been a good compulsory saving tool for retirement.

Conclusion

Its always better to start early on savings. Where goals are clearly visible,savings instrument can be easily selected. As far as possible,loans should be avoided at a young age,especially when it is for consumption or depreciating assets.