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.