Express Clinic

Other details:Spouse 8211; Asha Nambiar 28

Status amp; goals

Ajesh and Asha are recently married. They want to have a blueprint for their financial life as they begin their life together. They plan to start investing immediately for their future goals and need guidance for the same. Their main goals are to plan for education for two children they plan to have and for their own retirement.

Needed

A guide for a new financial life together.

Monthly Income Rs 1,00,000

Monthly surplus Rs 40,000

Monthly expenses Rs 15,000

Emi on loans Rs 45,000

Annual expenses PA Rs 77,000

Goals in order of priority

Children Education Inflation at 10

Current value Rs 10 lakh each

Future value 2035 Rs 81.40 lakh,1st child

Future value 2039 Rs 1.19 crore,2nd child

Children Marriage Inflation at 8

Current value Rs 15 lakh

Future value 2043 Rs 1.51 crore,1st child

Future value 2045 Rs 1.76 crore,2nd child

Retirement Planning 2037

Pre- Retirement Inflation at 8,Post Retirement Inflation at 7,Growth of Corpus at the rate of 8,Life expectancy 85 years

Current Annual Expenses Rs 1.80 lakh

Future Value 2037 Rs 11.41 lakh per annum

Corpus Required Rs 3 crore

current investments

Property Rs 65,00,000

EPF Rs 4,00,000

PPF Rs 75,000

Fixed Deposits Rs 1,50,000

Mutual Funds Rs 3,00,000

Saving Accounts and Gold Rs 6,50,000

Findings

Emergency fund

Ajesh has Rs 3 lakh in savings account and fixed deposit. This covers 5 months of expenses and EMI.

Health Insurance

They have a decent health cover of Rs 5 lakh.

Life Insurance

Ajesh has a term plan of Rs 50 lakh. The couple have a savings cum insurance policy of Rs 5 lakh each. The home loan is separately covered for the outstanding amount. The risk cover for Ajesh seems sufficient for now. Asha is under insured.

Existing Investments

Their largest investment is property,which is their primary residence. Other investments are mostly in debt. They started investing in equity and gold through SIPs since last year.

Liabilities

Ajesh has an outstanding home loan of Rs 27 lakh at 11.25. Car loan outstanding of Rs 3 lakh at 10.45.

Credit card purchase was converted to EMI for which Ajesh is paying Rs 6,500 per month with 10 months to go.

Recommendations

Emergency Fund

They have Rs 3 lakh in liquid or near liquid form. This covers five months of expenses and EMI. They can continue to maintain this amount. The savings account should have the facility of linked FDs. This will fetch them a little more in interest and will be convenient to use in case of an emergency. In case Asha plans to take a break post maternity,the contingency funds will have to be shored up further. They can look at ultra short term debt mutual funds for this purpose.

Express Tip: Always keep 3-6 months of expenses in ready to use form. If funds are available,insurance premiums can also be kept aside.

Health insurance

The cover of Rs 5 lakh for Ajesh and Asha is sufficient for now. Ajeshs parents are covered by health insurance from his mothers ex-employer. Ajesh should look at getting a personal health cover before he changes job. The new company may or may not have health benefits available.

Express Tip: Health insurance should be present at all times unless there is sufficient corpus available to cover any health contingencies.

Life Insurance

Ajeshs risk cover is sufficient in current circumstances. Asha should get a cover of Rs 50 lakh. It would cost her about Rs 7,500 per annum. Ajesh should increase his life insurance using a term insurance policy when they start a family. The current insurance policies are low return products. But they are not creating much cash flow problems,hence they can be continued.

Express Tip: Term insurance is the best form of life insurance. It should be the primary tool for risk coverage.

Child Goals

They can meet the education and marriage goals for their children by earmarking investments of

Rs 20,000 per month in equity. The best option would be to start SIPs into diversified equity mutual funds. Ajesh is already having SIP of Rs 5,000,he should increase the amount to Rs 20,000 per month.

Express Tip: An early start is a great advantage to meeting goals comfortably.

Retirement:

Ajesh and Ashas EPF will meet most of the requirement of their retirement expenses. The EPF should contribute about Rs 2.30 crore. PPF will contribute a small amount. The balance can be raised using mutual fund SIP investment of Rs 4000 per month.

Express Tip: PF is a hidden ally in retirement corpus creation. It should not be withdrawn before retirement as far as possible.

Debt Management

They spend 45 of their income on debt repayment. Long term debt is 30 which is a good indicator. They should not let debt cross 40 of income. Ajesh has opted for EMI scheme on credit card. He should look at the fine print before getting into any such schemes. They may prove to be expensive options most of the times. If there is no penalty for pre-payment,he would be better off retiring this debt in the next two months. This will free up Rs 6500 worth of cashflow. Since the cashflow position is in surplus after accommodating all goals,Ajesh should look at reducing his debt by make part payments at regular intervals. Both regular savings and bonuses can be utilized for this purpose.

Budgeting

We have not considered the maturity values of the insurance policies in these calculations. They will be added to the overall wealth created. They should also look at investing in PPF to the maximum possible amount of Rs 1 lakh each. This is a superb tool in debt which helps in creating wealth without volatility. They should also not withdraw their PF balance at any time till retirement. In case of job change,just transfer the balance to your new employer.

Ajesh and Asha have done well so far. To continue on their path to achieve their goals they should take care of the following things:

1. Be disciplined in investments.

2. Do not run after fads. Promises of extraordinary returns from products that you do not understand might lead you to trouble. Stick to simple time tested products.

3. Do your homework before getting into any investments. Try to see beyond the packaging into what Is the actual product.

4. Review your financial plan once a year to check if any changes are required.

Conclusion

The best thing Ajesh and Asha have done for their personal finance is to have started planning and saving early. Time horizon is one single factor in investment which can make a huge difference to the outcome of investments. They are well set for meeting their goals and for wealth creation.

Plan Constructed by: Kiran Telang,