Balancing wants and responsibilities

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.
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THE PLAN: The Deshpandes maintain their family budget meticulously, but they need to build a contingency reserve and focus on clearing off loan