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.