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This is an archive article published on April 25, 2011

Express Money: Saurabhs financial plan

Saurabh (43) returned from Gulf two years back and is since then employed as a project manager with a private firm. He is the only earning member of the family. He stays with his retired father (70),wife,Kirti (39),daughter,Rutvi (12),son,Aryan (9) & sister (40).

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During his earning years in gulf,he accumulated & saved a decent amount,however failed to invest,due to lack of knowledge & guidance. Since he compromised on his pay to be back in India with his family,there is a substantial fall in the yearly surplus generated. The major concerns are deployment of cash assets and the YoY surplus,to create education & marriage corpus for the kids and a retirement corpus. They also have a car loan to be repaid.

Annual cash flow

Income Rs 6 lakh

Regular Expenses

Rs 3,24,000

Car EMI Rs 76,908

Vacation Rs 50,000

Mediclaim Rs 7,280

Life insurance premium Rs 84,324

Surplus 57,488

Financial Goal’s

Rutvis education (2016-21)

Current Cost Rs 7 lakh

Future Cost Rs 12,23,589

Aryans education (2019-24)

Current Cost Rs 7 lakh

Future Cost Rs 14,98,949

Rutvis marriage (2023)

Current Cost Rs 3 lakh

Future Cost Rs 6,75,657

Aryans marriage (2027)

Current Cost Rs 3 lakh

Future Cost Rs 8,85,649

Retirement Corpus

(2028 onwards)

Current Cost Rs 27,14,769

Future Cost Rs 1,86,39,714

Inflation assumed @ 7%

Returns @ 10-12% based on time span Post retirement returns @ 9%

Life span 80 years

Findings

Investments are mainly in savings a/c & fixed deposits.

Life Insurance policies consist of endowments & ULIPs with a low cover of Rs 9.30 lakh for Saurabh

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Health cover is at Rs 1 lakh each which is very low.

Sister not covered.

Accident cover is nil,except through built in the endowment policies

Car EMI is 13% of income.

Recommendations

Emergency Fund

Rs 1 lakh

Should be maintained to the extent of 3 months expenses i.e. Rs 1 lakh,to overcome any untoward circumstance like loss of job,medical emergency etc. Maintain Rs 40,000 in bank savings account & the balance in short term debt mutual funds.

Medical corpus

Rs 1 lakh

Medical corpus to the extent of Rs 1,00,000 to be maintained in a short term debt fund keeping in view the age of your father.

Lefe insurance cover

Rs 90 lakh

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Life insurance cover shortfall to the extent of Rs 90,00,000. Surrender the existing policies & take a term plan for a 17 year term. The resultant premium saving every year can add to the surplus.

Express Tip

Insurance policies help the family to fill the gap of capital required to run the daily expenses and meet the important responsibilities of the bread winner in his absence. Term insurance is the cheapest form of insurance,hence affordable to take a high risk cover at a low cost. Online versions are cheaper than the offline ones.

Medical cover

Rs 3 lakh

Medical cover needs to be up upgraded to 3,00,000 each for the major family members i.e. self,wife,sister & father.

Express Tip

Mediclaim is an important tool to pass on the risk for a premium to meet the rising medical costs.

Accident and disability cover

Rs 50 lakh

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Accident and disability cover to be availed of for self to the extent of Rs 50,00,000 which shall come at a premium of around 7,000 p.a.

Express Tip

It covers temporary & permanent disablement too besides covering accidental death. Medical costs cover option also available.

Car loan

Car loan should be repaid immediately from existing investments.

Express Tip

Loans are not a good idea when we are sitting on cash & our return on investments is lower than the cost of the borrowing.

The cash outflow on a month to month basis needs to be monitored to keep the expenses in check.

Goal Related Recommendations

Rutvi Education

Lumpsum required

Rs 4,84,239

Monthly Investments-NA

Aryans Education

Lumpsum required

Rs 4,22,237

Monthly Investments

Rs 5,486

Total

Lumpsum required

Rs 90,6476

Monthly Investments

Rs 5,486

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Rutvis education can be funded either by way of lumpsum deployment of funds from the fixed deposits by systematically transferring (STP) to diversified equity funds over the next 12 to 18 months.

Aryans education can be easily met by way of a systematic monthly investment plan (SIP) into diversified equity funds.

Express Tip

Any shortfall in educational costs shall be funded by way of Educational Loans,with the underlying commitments from the kids.

Retirement corpus

Retirement shall be funded from the PF corpus being accumulated & the balance by SIP into diversified equity funds @ Rs 19,461 monthly.

Rutvi marriage

Rs 1,123

Monthly Investments

Aryan marriage

Rs 1,695

Monthly Investments

Total

Rs 2,818

Monthly Investments

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Presently this is not possible but investments should be considered only after retirement & education provisions are fully taken care of.

Express Tip

Effective money management is the key to financial success,earning sub inflation returns are a drag on the growth of the corpus.

For expert guidance on your financial planning email us your details at expressmoney@expressindia.com

CONCLUSION
Investments into financial products that give returns below inflation would be negative for the growth of the corpus. Look at equity mutual funds for long term growth. Emergency corpus to the extent of 3 months expenses must be maintained to overcome any untoward circumstances