Balancing wants and responsibilities
This family is a rare example of one where the inflows equal the outflows, finds financial planner Gaurav Mashruwala
Bhushan Deshpande says that his father is the best money manager. The retired government servant used to earn a salary of Rs 3,000 per month. But he got his five children—four daughters and one son—educated and married. Bhushan’s mother played no small role in this. She used to regularly take on stitching jobs. And she would meticulously write down the family budget, a habit which Bhushan has now picked up. Even the children contributed in their own way. They started an agency to sell small saving schemes and life insurance. In between, the family also traded in saris. Bhushan says, “I do not remember even a single instance, where there was dispute about an expense within the family.”
Today, at 36, Bhushan holds a diploma in mechanical engineering and works for a multinational. His wife, Mansi, is a housewife. Bhushan had not only funded his own marriage but also promised his wife that within a year of marriage, they would move into their own house—which he has honoured. They have two sons, Chinmay (six) and Pushkar (two).
What are they saving for?
First, they want to create a corpus of Rs 2.50 lakh to support their parents. They need Rs 6 lakh each for their sons’ higher education after 12 and 16 years; and Rs 4 lakh each for the boys’ marriages—after about 19 and 23 years. At the time of retirement, the couple wishes to have corpus of Rs 15 lakh. Apart from these responsibilities, they also dream of a car and some vacation. All the above costs are at today’s rate of inflation.
Where is he today?
Cash flow: Yearly inflow is Rs 2.68 lakh; outflow is also Rs 2.68 lakh. This means their family budget is tallying—a rare feature. The outflow includes yearly savings, insurance premium, EPF/PPF contributions, mortgage EMI, school fees, taxes and routine household expenses. About 23.5% of inflow is being diverted towards the EMI. Monthly mandatory expense is about Rs 15,000.
Net worth: Total assets are worth Rs 13 lakh. Against this, the liability is Rs 3.44 lakh (home loan and personal loan) which is about 26% of assets.
Contingency fund: Rs 2,000 is kept in cash/near cash assets to meet contingencies.
Health and life insurance: Health insurance of Rs 1 lakh is provided by the employer. Bhushan’s life insurance cover is Rs 2.60 lakh, through investment-oriented policies.
Savings and investments: Out of total assets of Rs 13 lakh, assets worth Rs 2.72 lakh is for investment purpose. The rest is for self consumption. Invested assets include stocks and shares (Rs 75,000), equity mutual fund (Rs 1.75 lakh), PPF and other postal saving schemes (Rs 20,000), cash (Rs 1,000), and saving bank balance (Rs 1,000). About 56% of the portfolio is in equity.
Fiscal report
The family budget is maintained very meticulously. About 23% of the inflow is being diverted towards a variety of savings. This is very good given the income level. Debt is within permissible limits. Contingency fund is dangerously low. Health insurance is also low. Life insurance is only in investment-oriented policies and hence actual cover is inadequate.
The way ahead
Contingency plan: Increase contingency fund to Rs 45,000. Ensure all incremental savings are diverted towards creating a contingency fund.
Health and life insurance: Opt for additional health cover of Rs 2 lakh for each family member. Also, Bhushan should have life cover of Rs 50 lakh through a term plan. This is keeping in mind both sons’ education and marriage needs, parental responsibility and their own retirement. Debt management: Outstanding loan and EMI are well within permissible limits. Therefore, they should continue servicing the loan at the same rate. Any bonus or increments received should be used to clear off loan at the earliest..
Planning for financial goals
Corpus for parents: Creating a corpus of Rs 2.50 lakh is of topmost priority with immediate effect. Therefore, they should liquidate part of equity and equity mutual fund portfolio and park these funds into a debt mutual fund.
Children’s education and marriage: Goals of higher education and marriage are more than a decade away. Therefore, they should start systematic investment into an index fund and an ELSS (equity linked saving scheme).
Retirement: Once home loan is paid, they should start investing every month an amount equivalent to current EMI into a diversified large cap mutual fund.
Tax: Additional health insurance will give a tax benefit under Section 80-D. Further, life insurance and ELSS are entitled for the Section 80-C benefit. The sons’ tuition fees also qualifies for the benefit, as does repayment of the home loan. If all the stated benefits are claimed, then not only will they help in reaching financial goals, but will also bring down tax liability virtually to nothing.
(If you wish to be featured in this column, email: moneymakeover@ indiatimes.com)
THE PLAN: The Deshpandes maintain their family budget meticulously, but they need to build a contingency reserve and focus on clearing off loan
Tuesday, January 13, 2009
The birth of a daughter turned the tide
The birth of a daughter turned the tide
Financial planner
Gaurav Mashruwala
meets a family that steers clear of the stock markets
Samir Ranjan had a financially comfortable childhood. His father is an occupational therapist and his mother is a retired teacher. The family has had a steady income flow and lives life simply. Both parents ensured that Samir’s necessities were met so that he could concentrate on his studies and future.
While his parents were into saving and investments, and his mother also kept the family budget, Samir never bothered with money matters. In fact, he became quite careless. Once, when he was 28 years old, his parents had sent him a demand draft of Rs 50,000. Samir did not deposit it in the bank for more than four months.
However, the birth of his daughter, Shreya, three years ago, has changed his attitude. There is disciplined savings and investment and he now micro-manages the family finances. Samir, 32, is also an occupational therapist, and works for the government of India at Dapodi, near Pune. His job involves rehabilitating disabled individuals occupationally. His wife, Sangeeta, is from Pune, and is the daughter of a naval officer. She is currently doing research in zoology.
What are they saving for?
Their top priority is to create a corpus of Rs 4 lakh for Shreya’s higher education after 17 years. Next, they want to move to a bigger house in 10 years. The differential cost would be Rs 15 lakh to Rs 20 lakh. Shreya’s marriage after 20 years will cost Rs 5 lakh. Lastly, they want a corpus of Rs 1 crore at the time of retirement, after 30 years. The family also dreams of owning a small car after two years. All the costs are at today’s rate of inflation.
Where are they today?
Cash flow: Total yearly inflow from Samir’s salary and Sangeeta’s fellowship and other interest is Rs 3.53
lakh. Against this, the yearly outflow is Rs 2.43 lakh, which includes mandatory savings, routine household expenses, insurance premium, school fees and expenses incurred on entertainment.
Net worth: Total assets are worth Rs 23.29 lakh. Out of this, assets worth Rs 15 lakh are for self-consumption. The cost of the house is Rs 13 lakh and the jewellery is worth Rs 2 lakh. The couple has no liability.
Contingency fund: Funds equivalent to about one month’s household expenses are lying in the bank.
Health and life insurance: The family is covered by Samir’s employer. Total life cover is worth Rs 1.50 lakh.
Savings and investments: Value of assets from savings and investment perspective is Rs 8.29 lakh. This includes Rs 2,000 in the savings account and Rs 18,000 in a fixed deposit. EPF/PPF Rs 19,000, NSC Rs 40,000, and Post Office monthly income scheme + recurring deposit Rs 7.50 lakh. All their assets are in debtbased instruments.
Fiscal report
They have a simple lifestyle. Expenses are well within their means. There is no loan. Contingency fund is low. Life insurance is inadequate. All life policies are investment-oriented. While Samir’s employer provides complete health cover, because it is a government organization, there could be red tape at the time of making an actual claim. There is absolutely no exposure in equity.
The way ahead
Contingency plan: First increase contingency fund to Rs 60,000, by setting aside any surplus money. Ensure that at least Rs 10,000 is kept in cash at home.
Health insurance: Opt for a Rs 5 lakh floating health policy for the entire family from an independent insurance company as a back-up.
Life insurance: Increase Samir’s life insurance cover to Rs 50 lakh through a term insurance policy.
Planning for financial goals
Daughter’s higher education:
As and when Post Office investments mature, transfer Rs 4 lakh into an index mutual fund. Since the goal is 17 years away, keeping funds in a debt-based instrument is very risky—while their principal amount will remain intact, they will have heavily lost to inflation.
Buying a house: (a) At the time of buying a bigger house, sell off the existing house and use the proceeds to purchase a bigger house. (b) Also, park the maturity proceeds of approximately Rs 3.50 lakh from Post Office schemes into a blended mutual fund which has 20% equity and 80% debt. (c) For the balance, opt for a housing loan.
Daughter’s marriage and their retirement: Systematically start investing Rs 6,000 in an index fund and Rs 1,500 in a gold fund every month to achieve these goals. Being a government employee, Samir is also entitled to several other tax-favoured retirement benefits.
If the couple is not comfortable investing in equity, then they should either drastically reduce their funds requirement for all financial goals or invest much larger amounts.
THE PLAN: The Ranjans have zero exposure to equity. Keeping funds in a debtbased instrument is unwise—while their principal amount will remain intact, over the years, they will have heavily lost to inflation
Financial planner
Gaurav Mashruwala
meets a family that steers clear of the stock markets
Samir Ranjan had a financially comfortable childhood. His father is an occupational therapist and his mother is a retired teacher. The family has had a steady income flow and lives life simply. Both parents ensured that Samir’s necessities were met so that he could concentrate on his studies and future.
While his parents were into saving and investments, and his mother also kept the family budget, Samir never bothered with money matters. In fact, he became quite careless. Once, when he was 28 years old, his parents had sent him a demand draft of Rs 50,000. Samir did not deposit it in the bank for more than four months.
However, the birth of his daughter, Shreya, three years ago, has changed his attitude. There is disciplined savings and investment and he now micro-manages the family finances. Samir, 32, is also an occupational therapist, and works for the government of India at Dapodi, near Pune. His job involves rehabilitating disabled individuals occupationally. His wife, Sangeeta, is from Pune, and is the daughter of a naval officer. She is currently doing research in zoology.
What are they saving for?
Their top priority is to create a corpus of Rs 4 lakh for Shreya’s higher education after 17 years. Next, they want to move to a bigger house in 10 years. The differential cost would be Rs 15 lakh to Rs 20 lakh. Shreya’s marriage after 20 years will cost Rs 5 lakh. Lastly, they want a corpus of Rs 1 crore at the time of retirement, after 30 years. The family also dreams of owning a small car after two years. All the costs are at today’s rate of inflation.
Where are they today?
Cash flow: Total yearly inflow from Samir’s salary and Sangeeta’s fellowship and other interest is Rs 3.53
lakh. Against this, the yearly outflow is Rs 2.43 lakh, which includes mandatory savings, routine household expenses, insurance premium, school fees and expenses incurred on entertainment.
Net worth: Total assets are worth Rs 23.29 lakh. Out of this, assets worth Rs 15 lakh are for self-consumption. The cost of the house is Rs 13 lakh and the jewellery is worth Rs 2 lakh. The couple has no liability.
Contingency fund: Funds equivalent to about one month’s household expenses are lying in the bank.
Health and life insurance: The family is covered by Samir’s employer. Total life cover is worth Rs 1.50 lakh.
Savings and investments: Value of assets from savings and investment perspective is Rs 8.29 lakh. This includes Rs 2,000 in the savings account and Rs 18,000 in a fixed deposit. EPF/PPF Rs 19,000, NSC Rs 40,000, and Post Office monthly income scheme + recurring deposit Rs 7.50 lakh. All their assets are in debtbased instruments.
Fiscal report
They have a simple lifestyle. Expenses are well within their means. There is no loan. Contingency fund is low. Life insurance is inadequate. All life policies are investment-oriented. While Samir’s employer provides complete health cover, because it is a government organization, there could be red tape at the time of making an actual claim. There is absolutely no exposure in equity.
The way ahead
Contingency plan: First increase contingency fund to Rs 60,000, by setting aside any surplus money. Ensure that at least Rs 10,000 is kept in cash at home.
Health insurance: Opt for a Rs 5 lakh floating health policy for the entire family from an independent insurance company as a back-up.
Life insurance: Increase Samir’s life insurance cover to Rs 50 lakh through a term insurance policy.
Planning for financial goals
Daughter’s higher education:
As and when Post Office investments mature, transfer Rs 4 lakh into an index mutual fund. Since the goal is 17 years away, keeping funds in a debt-based instrument is very risky—while their principal amount will remain intact, they will have heavily lost to inflation.
Buying a house: (a) At the time of buying a bigger house, sell off the existing house and use the proceeds to purchase a bigger house. (b) Also, park the maturity proceeds of approximately Rs 3.50 lakh from Post Office schemes into a blended mutual fund which has 20% equity and 80% debt. (c) For the balance, opt for a housing loan.
Daughter’s marriage and their retirement: Systematically start investing Rs 6,000 in an index fund and Rs 1,500 in a gold fund every month to achieve these goals. Being a government employee, Samir is also entitled to several other tax-favoured retirement benefits.
If the couple is not comfortable investing in equity, then they should either drastically reduce their funds requirement for all financial goals or invest much larger amounts.
THE PLAN: The Ranjans have zero exposure to equity. Keeping funds in a debtbased instrument is unwise—while their principal amount will remain intact, over the years, they will have heavily lost to inflation
Teach kids to earn their pocket money
Teach kids to earn their pocket money
Financial planner
Gaurav Mashruwala
finds a family that is astonishingly wellorganized
When he was a child, K T Markose had to earn his pocket money. His father would pay him for doing household chores. The rates were pre-decided—25 paise for going to the flour mill, 50 paise for more intense work, and so on. His earnings could be spent on buying a cricket ball or eating ‘gola’. However, he was told to track all expenses meticulously.
Today, at 28, Markose, is grateful to his parents for inculcating what he calls his diary habit. Born and raised in Mumbai, Markose did his BE (Mechanical) and went on to further educate himself in pre-sea training. He is now a fourth engineer in the merchant navy, a dream he had visualized since he was in the ninth standard. His father is a personnel officer with YMCA. His mother retired as a nurse and his younger brother, Skaria, is studying.
Markose’s wife, Trupti, is from Vadodara. She has done her MA in engineering and is a lecturer in an engineering college. They got married exactly a year ago.
What are they saving for?
They want to purchase a house worth Rs 45 lakh at the earliest. Markose wants to pursue further studies in about two years—which will cost Rs 10 lakh. Next, they want to set aside Rs 4 lakh for their parents. When they have children, they want to create a corpus of Rs 10 lakh for their marriage and Rs 15 lakh for their education. They also dream of a car worth Rs 5 lakh and foreign travel.
Where are they today?
Cash flow: Annual inflow from all sources is about Rs 9 lakh, though this is not consistent because Markose is not always sailing. The outflow is about Rs 3 lakh, which goes towards taxes, insurance premium, mandatory savings and household expenses. Net worth: Total assets are worth Rs 11 lakh. Of this, Rs 9 lakh are in a savings account. Jewellery is worth Rs 2 lakh. The couple does not have any liabilities.
Contingency fund: Funds equivalent to about 36 months’ household expenses are in a savings account.
Health and life insurance: Each family member has health cover of Rs 1 lakh. Markose also has some benefit from his employer. Trupti’s life cover is worth Rs 3 lakh (investment-oriented polices). Markose does not have any life cover.
Fiscal report
They have a decent income level. Inflow is not constant, but expenses are well within means. Large funds are lying idle in savings bank account. There are no investments, nor liabilities. Health insurance is low. Markose does not have life cover.
The way ahead
Markose is in the merchant navy and sails for eight-nine months in a year. He should, therefore, give his general ‘power of attorney’ to his wife and/or any other family member. This will be useful whenever the need arises to communicate with income tax department, banks, or any other institutions.
Contingency plan: They should keep aside funds equivalent to six months’ mandatory expenses. Since inflow is not stable, a larger reserve is recommended. Total reserve to be set aside is Rs 1.50 lakh. Of this, they should keep Rs 1.25 lakh in a savings bank linked to a fixed deposit and the balance in cash at home.
Health and life insurance: First, they should get details of health cover provided by Markose’s employers. Next, they should ensure that every family member is covered for at least Rs 3 lakh, increasing this to Rs 5 lakh each in the future.
Markose is the main earning member. Therefore, he must have life insurance, through term plans, worth Rs 1 crore.
Planning for financial goals
Home buying: Based on an annual income of Rs 9 lakh, the couple will be able to borrow about Rs 36 lakh from a housing finance company. Further, in the next 12 months they should save about Rs 6 lakh. The balance of Rs 3 lakh can be drawn from their savings account. They should keep aside Rs 3 lakh in a debt-based mutual fund till the house is bought.
Higher education: If they buy their home, then taking a sabbatical for higher education is not possible as the couple will need regular income to service their home loan. Therefore, this goal will have to wait till the home loan is paid back.
Parental responsibilities: After home purchase, they should set aside Rs 50,000 every month for eight months in a debt-based mutual fund. The corpus so created can be utilised for meeting financial responsibilities towards parents.
Children’s education and marriage: After creating a corpus for parents, they should invest Rs 35,000 every month in an index fund to meet longterm expenses of children’s education and marriage. Surplus left after investing for children should be utilised to aggressively pay off the housing loan. Once this is paid back, Markose can pursue higher studies. They should ensure that, at the time of taking this sabbatical, there is no debt burden on the family.
THE PLAN: Trupti and Markose need to save and invest aggressively to meet their life goals
Financial planner
Gaurav Mashruwala
finds a family that is astonishingly wellorganized
When he was a child, K T Markose had to earn his pocket money. His father would pay him for doing household chores. The rates were pre-decided—25 paise for going to the flour mill, 50 paise for more intense work, and so on. His earnings could be spent on buying a cricket ball or eating ‘gola’. However, he was told to track all expenses meticulously.
Today, at 28, Markose, is grateful to his parents for inculcating what he calls his diary habit. Born and raised in Mumbai, Markose did his BE (Mechanical) and went on to further educate himself in pre-sea training. He is now a fourth engineer in the merchant navy, a dream he had visualized since he was in the ninth standard. His father is a personnel officer with YMCA. His mother retired as a nurse and his younger brother, Skaria, is studying.
Markose’s wife, Trupti, is from Vadodara. She has done her MA in engineering and is a lecturer in an engineering college. They got married exactly a year ago.
What are they saving for?
They want to purchase a house worth Rs 45 lakh at the earliest. Markose wants to pursue further studies in about two years—which will cost Rs 10 lakh. Next, they want to set aside Rs 4 lakh for their parents. When they have children, they want to create a corpus of Rs 10 lakh for their marriage and Rs 15 lakh for their education. They also dream of a car worth Rs 5 lakh and foreign travel.
Where are they today?
Cash flow: Annual inflow from all sources is about Rs 9 lakh, though this is not consistent because Markose is not always sailing. The outflow is about Rs 3 lakh, which goes towards taxes, insurance premium, mandatory savings and household expenses. Net worth: Total assets are worth Rs 11 lakh. Of this, Rs 9 lakh are in a savings account. Jewellery is worth Rs 2 lakh. The couple does not have any liabilities.
Contingency fund: Funds equivalent to about 36 months’ household expenses are in a savings account.
Health and life insurance: Each family member has health cover of Rs 1 lakh. Markose also has some benefit from his employer. Trupti’s life cover is worth Rs 3 lakh (investment-oriented polices). Markose does not have any life cover.
Fiscal report
They have a decent income level. Inflow is not constant, but expenses are well within means. Large funds are lying idle in savings bank account. There are no investments, nor liabilities. Health insurance is low. Markose does not have life cover.
The way ahead
Markose is in the merchant navy and sails for eight-nine months in a year. He should, therefore, give his general ‘power of attorney’ to his wife and/or any other family member. This will be useful whenever the need arises to communicate with income tax department, banks, or any other institutions.
Contingency plan: They should keep aside funds equivalent to six months’ mandatory expenses. Since inflow is not stable, a larger reserve is recommended. Total reserve to be set aside is Rs 1.50 lakh. Of this, they should keep Rs 1.25 lakh in a savings bank linked to a fixed deposit and the balance in cash at home.
Health and life insurance: First, they should get details of health cover provided by Markose’s employers. Next, they should ensure that every family member is covered for at least Rs 3 lakh, increasing this to Rs 5 lakh each in the future.
Markose is the main earning member. Therefore, he must have life insurance, through term plans, worth Rs 1 crore.
Planning for financial goals
Home buying: Based on an annual income of Rs 9 lakh, the couple will be able to borrow about Rs 36 lakh from a housing finance company. Further, in the next 12 months they should save about Rs 6 lakh. The balance of Rs 3 lakh can be drawn from their savings account. They should keep aside Rs 3 lakh in a debt-based mutual fund till the house is bought.
Higher education: If they buy their home, then taking a sabbatical for higher education is not possible as the couple will need regular income to service their home loan. Therefore, this goal will have to wait till the home loan is paid back.
Parental responsibilities: After home purchase, they should set aside Rs 50,000 every month for eight months in a debt-based mutual fund. The corpus so created can be utilised for meeting financial responsibilities towards parents.
Children’s education and marriage: After creating a corpus for parents, they should invest Rs 35,000 every month in an index fund to meet longterm expenses of children’s education and marriage. Surplus left after investing for children should be utilised to aggressively pay off the housing loan. Once this is paid back, Markose can pursue higher studies. They should ensure that, at the time of taking this sabbatical, there is no debt burden on the family.
THE PLAN: Trupti and Markose need to save and invest aggressively to meet their life goals
The sweet scent of money
The sweet scent of money
It took a lot of struggle, but here’s someone who has figured out what it takes to balance a budget, finds financial planner Gaurav Mashruwala
Mohammed Attarwala was two months old when he lost his father. At that time, his family consisted of his mother, an eight-year-old sister and an 11-year-old brother. As the name suggests, his father was in the family business of selling attar. When he died, Mohammed’s uncles ran the show. His mother had to then take up stitching jobs to ensure that ends meet. Thus money was tight throughout Mohammed’s childhood. “Life was extremely hard then,” recalls Mohammed, now 40 years old. But the silver lining is that his forced habit of frugality is paying off and helping to create wealth for the family.
When it comes to raising his children he is very clear. “They must know the value of money.” Saving habits are already being inculcated in both his sons, Ibrahim (10) and Husain (4), and both have piggy banks.
Mohammed has studied up to inter CA. He now takes up accounts writing assignments. His wife, Alifa, gives private tuitions and also teaches in a coaching class. Mohammed’s mother, Khatija Attarwala, also lives with them. Mohammed is extremely grateful to his elder brother whom he views as a father-figure.
What are they saving for?
They want to buy a house after five years. Currently they stay in rented premises. The budget for the new home, after adjusting the tenancy benefit, would be Rs 50 lakh. They need Rs 10 lakh to fund the higher education of their sons after 11 and 15 years; for their marriages, they plan to spend Rs 10 lakh after 17 and 25 years. Lastly, at the time of retirement after 20 years, they wish to have a corpus of Rs 1 crore. The couple also dreams of a car and foreign travel. All costs are at today’s rate of inflation.
Where are they today?
Cash flow: Total inflow is approximately Rs 10.70 lakh; outflow is Rs 7.67 lakh—which includes mandatory savings, insurance premium (Rs 1.50 lakh), routine household expenses, taxes and money spent on entertainment and vacations. Average monthly household expense is Rs 50,000. This does not include outflow for savings and entertainment.
Net worth: Total assets are worth Rs 1.08 crore. There are no liabilities. Assets worth Rs 22.50 lakh are for investment purpose and the rest are for self-consumption. Tenancy rights of the house they are living in is valued at Rs 80 lakh.
Contingency reserve: Total funds in the bank account and in cash is Rs 1 lakh—equivalent to two months’ mandatory household expenses.
Health and life insurance: Health insurance cover for each member of the family is worth Rs 1 lakh. There is no health insurance cover for Khatija Attarwala. Total life cover for Mohammed is Rs 48.25 lakh. This includes a term plan worth Rs 25 lakh. The rest are investment-oriented polices including ULIP.
Savings and investments: Value of invested assets is Rs 22.50 lakh. This includes bank and cash balance of Rs 1 lakh. Market value of direct equity is Rs 10 lakh, equity mutual fund Rs 8 lakh, and PPF Rs 3.50 lakh.
Fiscal report
Very good income stream. Since life style is simple, they generate a good surplus. Health insurance is low. Insurance policies are not generating optimum returns. Also, a large portion of surplus funds are being utilised to pay insurance premiums. The overall equity component in invested assets is good.
The way ahead
Contingency plan: Ensure that total funds in savings bank is linked to fixed deposits and cash at home is Rs 1.50 lakh. This is about three months’ household expenses.
Health insurance: Increase health cover for each member of family to Rs 5 lakh. Also, for Khatija Attarwala, opt for senior citizen health insurance available with most nationalized general insurance companies.
Life insurance: Opt for additional life cover of Rs 50 lakh through term plans. In case of ULIP policies, pay additional premium by withdrawing the amount from the policy. This will ensure that no hard-earned money is being utilised to pay for highly expensive financial products.
Planning for financial goals
Home buying: At the time of purchase of new house, sell off tenancy rights of existing house. Also liquidate ULIP. For balance amount, borrow funds.
Son’s education and marriage: Both goals are more than a decade away. Therefore investment for these goals should be in equity and gold. Since Mohammed has experience in investing in equity, he should invest Rs 30,000 per month equally into mid-small cap fund, international equity fund and gold fund.
Retirement: Apart from contribution into PPF, invest Rs 10,000 every month in equity fund. Also, if at the time of retirement the desired corpus has not been achieved, then consider reverse mortgaging the house.
It took a lot of struggle, but here’s someone who has figured out what it takes to balance a budget, finds financial planner Gaurav Mashruwala
Mohammed Attarwala was two months old when he lost his father. At that time, his family consisted of his mother, an eight-year-old sister and an 11-year-old brother. As the name suggests, his father was in the family business of selling attar. When he died, Mohammed’s uncles ran the show. His mother had to then take up stitching jobs to ensure that ends meet. Thus money was tight throughout Mohammed’s childhood. “Life was extremely hard then,” recalls Mohammed, now 40 years old. But the silver lining is that his forced habit of frugality is paying off and helping to create wealth for the family.
When it comes to raising his children he is very clear. “They must know the value of money.” Saving habits are already being inculcated in both his sons, Ibrahim (10) and Husain (4), and both have piggy banks.
Mohammed has studied up to inter CA. He now takes up accounts writing assignments. His wife, Alifa, gives private tuitions and also teaches in a coaching class. Mohammed’s mother, Khatija Attarwala, also lives with them. Mohammed is extremely grateful to his elder brother whom he views as a father-figure.
What are they saving for?
They want to buy a house after five years. Currently they stay in rented premises. The budget for the new home, after adjusting the tenancy benefit, would be Rs 50 lakh. They need Rs 10 lakh to fund the higher education of their sons after 11 and 15 years; for their marriages, they plan to spend Rs 10 lakh after 17 and 25 years. Lastly, at the time of retirement after 20 years, they wish to have a corpus of Rs 1 crore. The couple also dreams of a car and foreign travel. All costs are at today’s rate of inflation.
Where are they today?
Cash flow: Total inflow is approximately Rs 10.70 lakh; outflow is Rs 7.67 lakh—which includes mandatory savings, insurance premium (Rs 1.50 lakh), routine household expenses, taxes and money spent on entertainment and vacations. Average monthly household expense is Rs 50,000. This does not include outflow for savings and entertainment.
Net worth: Total assets are worth Rs 1.08 crore. There are no liabilities. Assets worth Rs 22.50 lakh are for investment purpose and the rest are for self-consumption. Tenancy rights of the house they are living in is valued at Rs 80 lakh.
Contingency reserve: Total funds in the bank account and in cash is Rs 1 lakh—equivalent to two months’ mandatory household expenses.
Health and life insurance: Health insurance cover for each member of the family is worth Rs 1 lakh. There is no health insurance cover for Khatija Attarwala. Total life cover for Mohammed is Rs 48.25 lakh. This includes a term plan worth Rs 25 lakh. The rest are investment-oriented polices including ULIP.
Savings and investments: Value of invested assets is Rs 22.50 lakh. This includes bank and cash balance of Rs 1 lakh. Market value of direct equity is Rs 10 lakh, equity mutual fund Rs 8 lakh, and PPF Rs 3.50 lakh.
Fiscal report
Very good income stream. Since life style is simple, they generate a good surplus. Health insurance is low. Insurance policies are not generating optimum returns. Also, a large portion of surplus funds are being utilised to pay insurance premiums. The overall equity component in invested assets is good.
The way ahead
Contingency plan: Ensure that total funds in savings bank is linked to fixed deposits and cash at home is Rs 1.50 lakh. This is about three months’ household expenses.
Health insurance: Increase health cover for each member of family to Rs 5 lakh. Also, for Khatija Attarwala, opt for senior citizen health insurance available with most nationalized general insurance companies.
Life insurance: Opt for additional life cover of Rs 50 lakh through term plans. In case of ULIP policies, pay additional premium by withdrawing the amount from the policy. This will ensure that no hard-earned money is being utilised to pay for highly expensive financial products.
Planning for financial goals
Home buying: At the time of purchase of new house, sell off tenancy rights of existing house. Also liquidate ULIP. For balance amount, borrow funds.
Son’s education and marriage: Both goals are more than a decade away. Therefore investment for these goals should be in equity and gold. Since Mohammed has experience in investing in equity, he should invest Rs 30,000 per month equally into mid-small cap fund, international equity fund and gold fund.
Retirement: Apart from contribution into PPF, invest Rs 10,000 every month in equity fund. Also, if at the time of retirement the desired corpus has not been achieved, then consider reverse mortgaging the house.
29, single, and well on his way…
29, single, and well on his way…
Financial planner Gaurav Mashruwala cautions this MBA to keep his liabilities low
Rahul Kumar Sinha's father worked in a nationalized bank in Patna. Rahul was one of five children. His father's salary, plus income from their village land, was enough for basics. However, education was a high priority. His parents lived in rented
premises all their life, so that their income and capital could be used to educate their children. Today, three are post-grads, two are graduates, and all are well-settled. His parents finally bought a house with the retirement proceeds from his father's employer.
Rahul is 29 years old, holds an MBA, and is single. He works with a private sector bank in Mumbai.
WHAT IS HE SAVING FOR?
Though his parents are independent, he wants to set aside Rs 1 lakh every year for them and other family members. This is his topmost priority.
He wants to purchase a house of his own within the next two-three years. For that he needs Rs 50 lakhs. He also dreams of a car worth Rs 7 lakhs and foreign travel worth Rs 1 lakh in the immediate future.
WHERE IS HE TODAY?
Cash flow: The total monthly inflow from his salary and investments is Rs 93,000. Of this, he spends Rs 41,000 on routine expense, rent, taxes, insurance premium and about 14 % towards the EMI on his education loan. Net worth: His assets are worth Rs 7.23 lakhs most of which is for investment purpose. He has jewelry worth Rs 20,000. On the liability side, he has an outstanding education loan of Rs 4 lakhs - equal to 55% of assets.
Contingency funds: He has Rs 80,000 lying in the bank and a liquid fund - equivalent to about 2.15 months mandatory expenses.
Health & life insurance: His employer has provided him health cover to the extent of Rs 5 lakhs. His life cover is Rs 13 lakhs. Of this, Rs 10 lakhs is in a term plan and the rest are investment oriented policies.
Savings & investment: Apart from Rs 80,000 in near cash assets, he has Rs 3.50 lakhs in stocks, Rs 45,000 in an equity mutual fund, Rs 1.10 lakhs in EPF/PPF, Rs 70,000 in Post Office schemes and Rs 40,000 in others.
Debt:equity ratio is 44:56.
Fiscal analysis: Good inflow. Expenses are very low. Almost Rs 52,000 can be saved every month. Health insurance is sufficient. Life insurance currently is sufficient however from long term perspective additional cover is recommended. More funds are invested in equity. This is favorable if there was no outstanding loan. EMI payout is within permissible limit but overall liability in comparison to assets is little high.
WAY AHEAD:
Contingency fund: Increase contingency reserve to Rs 90,000. Upon completion of education loan, bring it down to Rs 75,000.
Health & life insurance: Health insurance is sufficient. Carefully read all the terms and conditions of the cover provided by employer. While life insurance is sufficient now, responsibilities will keep adding up. Therefore, opt for additional cover of Rs 75 lakhs through two-three different term plans.
Loan management: Liquidate equity and pay off education loan. While psychologically this might be difficult to implement, currently there is double loss. On one end, the equity market is generating negative returns; on the other, there is interest burden on the education loan. By paying off loan, losses from both will be cut off.
FINANCIAL GOALS:
Parental responsibility: There is surplus of Rs 52,000 every month. Therefore, after increasing the contingency reserve, set aside funds in a debt fund. Create a corpus of Rs 1 lakh. While supporting parents can be done from the regular income, this corpus will be a buffer.
Home purchase: Delay purchase of home by two-three years. Try and save as much as possible in these years. Ensure amount to be borrowed is the lowest possible. Also, avoid borrowing for a tenure greater than 10 years.
PLANNER'S EYE:
The 20s and 30s should be one's golden saving years. This is the time when family responsibilities are manageable. Most financial goals are more than a decade away. The mid-30s bring the big home loan. In the early 40s, parental responsibilities start cropping up; by the mid to late-40s children need funds for higher education and their marriage. Soon, we are in the 50s and just a decade away from retirement. Over the years, our income increases but so do our expenses. Therefore, anyone who starts saving early in life will always have an edge.
Rahul has started saving early. Also he is focused onto equity. Lastly he is saving more than 50% of his inflow. All this will reap results. These are his big strengths. He should ensure that he borrows as little as possible and for the shortest possible time.
Financial planner Gaurav Mashruwala cautions this MBA to keep his liabilities low
Rahul Kumar Sinha's father worked in a nationalized bank in Patna. Rahul was one of five children. His father's salary, plus income from their village land, was enough for basics. However, education was a high priority. His parents lived in rented
premises all their life, so that their income and capital could be used to educate their children. Today, three are post-grads, two are graduates, and all are well-settled. His parents finally bought a house with the retirement proceeds from his father's employer.
Rahul is 29 years old, holds an MBA, and is single. He works with a private sector bank in Mumbai.
WHAT IS HE SAVING FOR?
Though his parents are independent, he wants to set aside Rs 1 lakh every year for them and other family members. This is his topmost priority.
He wants to purchase a house of his own within the next two-three years. For that he needs Rs 50 lakhs. He also dreams of a car worth Rs 7 lakhs and foreign travel worth Rs 1 lakh in the immediate future.
WHERE IS HE TODAY?
Cash flow: The total monthly inflow from his salary and investments is Rs 93,000. Of this, he spends Rs 41,000 on routine expense, rent, taxes, insurance premium and about 14 % towards the EMI on his education loan. Net worth: His assets are worth Rs 7.23 lakhs most of which is for investment purpose. He has jewelry worth Rs 20,000. On the liability side, he has an outstanding education loan of Rs 4 lakhs - equal to 55% of assets.
Contingency funds: He has Rs 80,000 lying in the bank and a liquid fund - equivalent to about 2.15 months mandatory expenses.
Health & life insurance: His employer has provided him health cover to the extent of Rs 5 lakhs. His life cover is Rs 13 lakhs. Of this, Rs 10 lakhs is in a term plan and the rest are investment oriented policies.
Savings & investment: Apart from Rs 80,000 in near cash assets, he has Rs 3.50 lakhs in stocks, Rs 45,000 in an equity mutual fund, Rs 1.10 lakhs in EPF/PPF, Rs 70,000 in Post Office schemes and Rs 40,000 in others.
Debt:equity ratio is 44:56.
Fiscal analysis: Good inflow. Expenses are very low. Almost Rs 52,000 can be saved every month. Health insurance is sufficient. Life insurance currently is sufficient however from long term perspective additional cover is recommended. More funds are invested in equity. This is favorable if there was no outstanding loan. EMI payout is within permissible limit but overall liability in comparison to assets is little high.
WAY AHEAD:
Contingency fund: Increase contingency reserve to Rs 90,000. Upon completion of education loan, bring it down to Rs 75,000.
Health & life insurance: Health insurance is sufficient. Carefully read all the terms and conditions of the cover provided by employer. While life insurance is sufficient now, responsibilities will keep adding up. Therefore, opt for additional cover of Rs 75 lakhs through two-three different term plans.
Loan management: Liquidate equity and pay off education loan. While psychologically this might be difficult to implement, currently there is double loss. On one end, the equity market is generating negative returns; on the other, there is interest burden on the education loan. By paying off loan, losses from both will be cut off.
FINANCIAL GOALS:
Parental responsibility: There is surplus of Rs 52,000 every month. Therefore, after increasing the contingency reserve, set aside funds in a debt fund. Create a corpus of Rs 1 lakh. While supporting parents can be done from the regular income, this corpus will be a buffer.
Home purchase: Delay purchase of home by two-three years. Try and save as much as possible in these years. Ensure amount to be borrowed is the lowest possible. Also, avoid borrowing for a tenure greater than 10 years.
PLANNER'S EYE:
The 20s and 30s should be one's golden saving years. This is the time when family responsibilities are manageable. Most financial goals are more than a decade away. The mid-30s bring the big home loan. In the early 40s, parental responsibilities start cropping up; by the mid to late-40s children need funds for higher education and their marriage. Soon, we are in the 50s and just a decade away from retirement. Over the years, our income increases but so do our expenses. Therefore, anyone who starts saving early in life will always have an edge.
Rahul has started saving early. Also he is focused onto equity. Lastly he is saving more than 50% of his inflow. All this will reap results. These are his big strengths. He should ensure that he borrows as little as possible and for the shortest possible time.
Don’t confuse insurance with investment
Don’t confuse insurance with investment
It's the most common mistake, and they get hit on both sides, says financial planner Gaurav Mashruwala
Ashfak Shaikh never asked his parents for pocket money. Since his childhood, he knew his father was working double shifts to support the family--with the Pune municipality during the day and giving tuitions in the evening. He managed to educate three sons. Ashfak rose to the occasion and became a broker for second-hand two-wheelers. “I must have traded in 50-60 two-wheelers,” says Ashfak. He believes in the joint family system where bonding counts for more than materialism. Ashfak, now 38, holds a BE and works with a multinational company. His wife Jasmine is a doctor. They have an eight-year-old daughter, Aliya.
WHAT IS THE COUPLE SAVING FOR?
(1) Ashfak wants to ensure that even in the worst of times he can support his parents (about Rs 60,000 per year) (2) A larger house (Rs 40 lakhs) (3) Rs 5 lakhs for Aliya's higher education after a decade and another Rs 5 lakhs for her marriage after 16 years (4) When they retire, after 23 years, they need a corpus which will generate Rs 9 lakhs per annum. They also dream of a luxury car (Rs 10 lakhs) and foreign travel.
WHERE ARE THEY TODAY?
Cash flow: Total yearly inflow
from all sources is Rs 17 lakhs. Against this, they spend Rs 13 lakhs on EMI for car and holiday home, taxes, insurance premium, support to parents, regular savings and expenses incurred on travel and entertainment. The last car EMI is due in October. Total EMI payout is about 10% of inflow. Mandatory monthly outflow is about Rs 95,000.
Statement of net worth: Value of total assets is Rs 48.70 lakhs. Of this, assets worth Rs 30 lakhs are for self consumption and nonearning (house, car and jewelry). Outstanding loan on car and holiday time-share is Rs 1.07 lakhs, about 2.21% of the assets.
Contingency fund: Total in savings bank, FD and in cash at home is Rs 3.95 lakhs—about four months’ mandatory household expenses.
Health & life insurance: Ashfak’s employer provides health cover of Rs 3 lakhs for the family. His life cover is Rs 17 lakhs through a ULIP and endowment policies.
Savings & investments: Value of assets other than those for self consumption is Rs 18.70 lakhs. Out of this Rs 3.95 lakhs is in cash/near cash. Apart from this, the value of direct equity is Rs 1 lakhs, equity-based mutual fund Rs 75,000, bonds/FD Rs 2 lakhs, EPF/PPF Rs 3 lakhs and stocks of Cosmos Bank valued at Rs 2 lakhs. Total premiums paid till date on ULIP and other investment-oriented policies is Rs 6 lakhs. However, its market value is currently lower.
FISCAL ANALYSIS:
Very good income level. Savings rate is also good. Health and life cover are insufficient. Amount spent on insurance premium is too large. Borrowing is within permissible limit. Equity component is low and is also skewed in favour of single Cosmos Bank stock.
WAY AHEAD:
Contingency fund: Keep only Rs 2.85 lakhs for contingencies. Deploy surplus as follows.
Health insurance: Increase health cover of Ashfak and Jasmine to Rs 5.00 lakhs each and that of Aliya to Rs 3.00 lakhs. Life Insurance: He must discontinue certain expensive insurance plans after completion of five years. Further opt for term plan worth Rs 75.00 lakhs.
Financial Goals:
Parental responsibility: Surplus in cash/near cash asset should be transferred into a monthly income plan of a mutual fund. However, continue supporting parents from regular income. Only in turbulent times use this fund to support parents.
Home buying: Preferably wait for two-three years, and then save about Rs 5 lakh per year in a debt fund. At the time of buying a new house, sell old one. Use sale proceeds plus investment in debt fund. If there is a shortfall, liquidate a part of the equity portfolio.
Aliya's education and marriage: Firstly, reduce investments in Cosmos Bank stocks to half. Park proceeds in a debt fund and systematically transfer into an index fund. After purchase of new home, systematically invest in index fund and gold fund for her education and marriage.
Retirement: Next two years’ savings would be needed for home buying. For another three-four years, deploy surplus for Aliya. Later, invest entire surplus in large cap fund and international equity fund for retirement.
PLANNER’S EYE: The family’s weakest link in their finances are their life insurance policies. Out of total life cover of Rs 17, lakhs, Rs 5 lakh cover is provided by the employer. For the rest, the premium being paid annually is Rs 2 lakhs.
Instead, if he had opted for term cover, then annual premium for Rs 12 lakh cover would have been Rs 5,000. Balance Rs 1.95 lakhs invested in a pure investment product would yield higher returns. It is the most common mistake people make-confusing insurance and investment.
It's the most common mistake, and they get hit on both sides, says financial planner Gaurav Mashruwala
Ashfak Shaikh never asked his parents for pocket money. Since his childhood, he knew his father was working double shifts to support the family--with the Pune municipality during the day and giving tuitions in the evening. He managed to educate three sons. Ashfak rose to the occasion and became a broker for second-hand two-wheelers. “I must have traded in 50-60 two-wheelers,” says Ashfak. He believes in the joint family system where bonding counts for more than materialism. Ashfak, now 38, holds a BE and works with a multinational company. His wife Jasmine is a doctor. They have an eight-year-old daughter, Aliya.
WHAT IS THE COUPLE SAVING FOR?
(1) Ashfak wants to ensure that even in the worst of times he can support his parents (about Rs 60,000 per year) (2) A larger house (Rs 40 lakhs) (3) Rs 5 lakhs for Aliya's higher education after a decade and another Rs 5 lakhs for her marriage after 16 years (4) When they retire, after 23 years, they need a corpus which will generate Rs 9 lakhs per annum. They also dream of a luxury car (Rs 10 lakhs) and foreign travel.
WHERE ARE THEY TODAY?
Cash flow: Total yearly inflow
from all sources is Rs 17 lakhs. Against this, they spend Rs 13 lakhs on EMI for car and holiday home, taxes, insurance premium, support to parents, regular savings and expenses incurred on travel and entertainment. The last car EMI is due in October. Total EMI payout is about 10% of inflow. Mandatory monthly outflow is about Rs 95,000.
Statement of net worth: Value of total assets is Rs 48.70 lakhs. Of this, assets worth Rs 30 lakhs are for self consumption and nonearning (house, car and jewelry). Outstanding loan on car and holiday time-share is Rs 1.07 lakhs, about 2.21% of the assets.
Contingency fund: Total in savings bank, FD and in cash at home is Rs 3.95 lakhs—about four months’ mandatory household expenses.
Health & life insurance: Ashfak’s employer provides health cover of Rs 3 lakhs for the family. His life cover is Rs 17 lakhs through a ULIP and endowment policies.
Savings & investments: Value of assets other than those for self consumption is Rs 18.70 lakhs. Out of this Rs 3.95 lakhs is in cash/near cash. Apart from this, the value of direct equity is Rs 1 lakhs, equity-based mutual fund Rs 75,000, bonds/FD Rs 2 lakhs, EPF/PPF Rs 3 lakhs and stocks of Cosmos Bank valued at Rs 2 lakhs. Total premiums paid till date on ULIP and other investment-oriented policies is Rs 6 lakhs. However, its market value is currently lower.
FISCAL ANALYSIS:
Very good income level. Savings rate is also good. Health and life cover are insufficient. Amount spent on insurance premium is too large. Borrowing is within permissible limit. Equity component is low and is also skewed in favour of single Cosmos Bank stock.
WAY AHEAD:
Contingency fund: Keep only Rs 2.85 lakhs for contingencies. Deploy surplus as follows.
Health insurance: Increase health cover of Ashfak and Jasmine to Rs 5.00 lakhs each and that of Aliya to Rs 3.00 lakhs. Life Insurance: He must discontinue certain expensive insurance plans after completion of five years. Further opt for term plan worth Rs 75.00 lakhs.
Financial Goals:
Parental responsibility: Surplus in cash/near cash asset should be transferred into a monthly income plan of a mutual fund. However, continue supporting parents from regular income. Only in turbulent times use this fund to support parents.
Home buying: Preferably wait for two-three years, and then save about Rs 5 lakh per year in a debt fund. At the time of buying a new house, sell old one. Use sale proceeds plus investment in debt fund. If there is a shortfall, liquidate a part of the equity portfolio.
Aliya's education and marriage: Firstly, reduce investments in Cosmos Bank stocks to half. Park proceeds in a debt fund and systematically transfer into an index fund. After purchase of new home, systematically invest in index fund and gold fund for her education and marriage.
Retirement: Next two years’ savings would be needed for home buying. For another three-four years, deploy surplus for Aliya. Later, invest entire surplus in large cap fund and international equity fund for retirement.
PLANNER’S EYE: The family’s weakest link in their finances are their life insurance policies. Out of total life cover of Rs 17, lakhs, Rs 5 lakh cover is provided by the employer. For the rest, the premium being paid annually is Rs 2 lakhs.
Instead, if he had opted for term cover, then annual premium for Rs 12 lakh cover would have been Rs 5,000. Balance Rs 1.95 lakhs invested in a pure investment product would yield higher returns. It is the most common mistake people make-confusing insurance and investment.
Dream on, but plan well too
Dream on, but plan well too
Financial planner
Gaurav Mashruwala
finds a couple who needs to understand the basics of money management
Mumbai is the city of dreams. If you dare to dream, Mumbai gives you the opportunity to make it happen. Subhan and Nilufer are one such couple who are dreaming big, but now need to start translating that into reality.
Subhan was born and brought up in Dharavi, and lives there today, with his mother Noorjahan and other members of the family. After graduating, Subhan pursued course in travel and tourism. Today he works in a travel agency. Subhan (32) and Nilufer (22) want to get out of Dharavi and own their own house and give best of education to their five month-old, Sameer. They also want to create retirement corpus so that they do not have to depend on their children.
WHAT ARE THEY SAVING FOR?
(1) Firstly, they want to purchase their own house, Rs 15 lakhs. (2) While they are not sure of the cost of education and marriage for Sameer, they feel Rs 50 lakhs would be a good amount. (3) Finally, for retirement they need Rs 60 lakhs after 30 years.
WHERE ARE THEY TODAY?
Cash flow: Total monthly inflow is Rs 25,000. Against this, the outflow is Rs 15,000, towards routine household expenses, tax and EMI. About 21% of income is going towards EMI.
Net worth: The only assets the couple has is jewelry worth Rs 3 lakhs. Against this, they have an outstanding loan of Rs 75,000. Funds were borrowed at the time of their marriage.
Contingency fund: There is no contingency fund.
Health & life insurance: There is absolutely no health and life insurance.
Savings & investment: Only savings they have is in the form of jewelry.
FISCAL ANALYSIS: The couple is able to save about 40% of their inflow. This is mainly due to a moderate standard of living. However, in the absence of a contingency reserve, health and life insurance, they are highly vulnerable to the vagaries of financial life.
WAY AHEAD:
Contingency reserve: From the monthly surplus available, they should slowly create corpus of Rs 45,000 to meet contingencies. This should be kept in a savings bank account linked to an FD.
Health & life insurance: After setting aside reserves for contingencies, purchase health cover worth Rs 2.50 lakhs for each member of the family. After premium is paid for health
cover, Subhan should get himself a term plan of Rs 20 lakhs. They should ensure that premiums for health and life insurance are spaced out. Borrowings: Only after the contingency reserve, and health and life insurance are in place, aggressively pay off the personal loan. Planning for financial goals: While all goals are more than decade away, since there are absolutely no invested assets, the couple must start investments in debt-based liquid instruments. The strategy should be to create a contingency reserve and purchase health and life insurance in the next six months. After that, every month, use a part of the funds to pay off the loan and from the balance amount, do the following:
In the first year: Start a recurring deposit in a nationalized bank or post office. From the second year onwards, continue the recurring deposit and start a PPF account. In the third year, start an additional systematic investment plan in a mutual fund which has 15% in equity and 85% in debt. After
about five years, start a systematic investment plan in an index fund.
PLANNER'S EYE
The couple is highly vulnerable to financial vagaries. Also, they are both absolutely ignorant about even basic money management. Across all strata of income-levels, it has been observed that even though there are the best intentions to create wealth, a lack of even basic financial knowledge remains a lifelong handicap. The good part about this couple is that even though they are from a moderate income group, they have not shied away from seeking help.
The first focus should be to protect one's self and family from the perils of emergencies, illness, disability and death. After that is taken care of, move up the ladder to pay off debt. Only after the two have been achieved, think of wealth creation. Creating wealth without forming a strong base to withstand perils is like constructing a building without making a foundation. The building will always be susceptible to risk and one bad event can destroy the entire structure.
Financial planner
Gaurav Mashruwala
finds a couple who needs to understand the basics of money management
Mumbai is the city of dreams. If you dare to dream, Mumbai gives you the opportunity to make it happen. Subhan and Nilufer are one such couple who are dreaming big, but now need to start translating that into reality.
Subhan was born and brought up in Dharavi, and lives there today, with his mother Noorjahan and other members of the family. After graduating, Subhan pursued course in travel and tourism. Today he works in a travel agency. Subhan (32) and Nilufer (22) want to get out of Dharavi and own their own house and give best of education to their five month-old, Sameer. They also want to create retirement corpus so that they do not have to depend on their children.
WHAT ARE THEY SAVING FOR?
(1) Firstly, they want to purchase their own house, Rs 15 lakhs. (2) While they are not sure of the cost of education and marriage for Sameer, they feel Rs 50 lakhs would be a good amount. (3) Finally, for retirement they need Rs 60 lakhs after 30 years.
WHERE ARE THEY TODAY?
Cash flow: Total monthly inflow is Rs 25,000. Against this, the outflow is Rs 15,000, towards routine household expenses, tax and EMI. About 21% of income is going towards EMI.
Net worth: The only assets the couple has is jewelry worth Rs 3 lakhs. Against this, they have an outstanding loan of Rs 75,000. Funds were borrowed at the time of their marriage.
Contingency fund: There is no contingency fund.
Health & life insurance: There is absolutely no health and life insurance.
Savings & investment: Only savings they have is in the form of jewelry.
FISCAL ANALYSIS: The couple is able to save about 40% of their inflow. This is mainly due to a moderate standard of living. However, in the absence of a contingency reserve, health and life insurance, they are highly vulnerable to the vagaries of financial life.
WAY AHEAD:
Contingency reserve: From the monthly surplus available, they should slowly create corpus of Rs 45,000 to meet contingencies. This should be kept in a savings bank account linked to an FD.
Health & life insurance: After setting aside reserves for contingencies, purchase health cover worth Rs 2.50 lakhs for each member of the family. After premium is paid for health
cover, Subhan should get himself a term plan of Rs 20 lakhs. They should ensure that premiums for health and life insurance are spaced out. Borrowings: Only after the contingency reserve, and health and life insurance are in place, aggressively pay off the personal loan. Planning for financial goals: While all goals are more than decade away, since there are absolutely no invested assets, the couple must start investments in debt-based liquid instruments. The strategy should be to create a contingency reserve and purchase health and life insurance in the next six months. After that, every month, use a part of the funds to pay off the loan and from the balance amount, do the following:
In the first year: Start a recurring deposit in a nationalized bank or post office. From the second year onwards, continue the recurring deposit and start a PPF account. In the third year, start an additional systematic investment plan in a mutual fund which has 15% in equity and 85% in debt. After
about five years, start a systematic investment plan in an index fund.
PLANNER'S EYE
The couple is highly vulnerable to financial vagaries. Also, they are both absolutely ignorant about even basic money management. Across all strata of income-levels, it has been observed that even though there are the best intentions to create wealth, a lack of even basic financial knowledge remains a lifelong handicap. The good part about this couple is that even though they are from a moderate income group, they have not shied away from seeking help.
The first focus should be to protect one's self and family from the perils of emergencies, illness, disability and death. After that is taken care of, move up the ladder to pay off debt. Only after the two have been achieved, think of wealth creation. Creating wealth without forming a strong base to withstand perils is like constructing a building without making a foundation. The building will always be susceptible to risk and one bad event can destroy the entire structure.
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