Begin with financial Plan is half done the phrase, goes to Mr. Arvind Rao, aged 30 years, and who is working in Chandigarh-based Company at a managerial level. His wife, Sunita, aged 27 years, is working in Private Company. The couple has decided to get their financial plan when the most people in their age would be happy throwing their money at the lavish life style and on the adult toys that world is luring them with. But, the Rao’s family differs here. It is not like that they are not enjoying their life but they don’t want to compromise their future goals at any cost.

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Current Situation

Mr. Arvind has decent monthly post-tax salary of Rs49,000 and his wife is earning Rs31,000 per month and the couple has total earned Rs80,000 per month which lays foundation for their future goals. Mr. Arvind’s gross salary is likely to grow at 8% p.a. whereas Sunita’s salary is expected to grow at 6% p.a.  The Couple has two children –daughter Ayushi aged 4 years and son Anshit, aged 1 year.

Financial Goals and Aspirations

  • Plan for Anshit’s and Ayushi’s higher education which is likely to be worth Rs 10 lakh each in today’s value at their age of 18 years.
  • To accumulate funds for marriage of Ayushi and Anshit. For Ayushi, they will require in present terms of Rs15 lakh when she attains 25 years and for Anshit he would require Rs12 lakh when he attains 26 years.
  • Buying a new car worth Rs7 lakh today, in the next 4 years (the car he currently owns is worth Rs 1.20 lakh)
  • Create a retirement corpus for expenses in his post-retirement period at the retirement age of 60 years. 

Expenses and other information

Arvind’s monthly household expenses are Rs40,000 out of which Rs8,000 is of Arvind’s personal expenses; this excludes his EMI loan and insurance premium. Arvind has two siblings. Arvind and his family stay with his mother. His father passed away due to sever heart attack on 16-Jan-2013, at the age of 62 years, leaving house as on date worth Rs 1.20 crore in which they are currently staying.

Arvind has a term insurance of Rs25 lakh for 20 years, the term expires 5 years from now. Both are covered under Group Medical Insurance for Rs 4 lakh family floater each provided by their respective employers. His mother has retired from central government services and also covered with medical CGHS scheme.

Current Savings and Assets

The couple has following savings and assets as on date;

Assets

                                             Current   Value (in Rs)

Cash   in hand

10,000

Saving   Bank Balance

50,000

Bank   Fixed Deposits

3,00,000

Diversified   Mutual Fund Value

2,60,000

PPF   Account Balance

4,27,000

Gold   ornaments at market Value

6,35,000

National   Saving Certificates

4,00,000

Provident   Fund Balance

1,00,000

Total

21,82,000

Liabilities
Personal   Loan

25,000

Net   Worth

21,57,000

Total

21,82,000

  The Financial Plan and its Assumptions

The financial plan has been prepared for them on the basis of above information provided by couple as on their incomes, expenses, investments and insurance etc. The rate of inflation is assumed at 8% per annum and higher education cost is inflated at 10% per annum. Equity Funds generates 12% return in the long term.

Emergency Fund Planning

It is advisable to keep emergency corpus of 5-6 months’ expenses. Based on his current expense, he should have maintained all time at least Rs2.40 lac as contingency fund in case of any loss of job, medical exigencies and other unforeseen event. Bank fixed deposits of Rs3 lakh can be allocated for this purpose.

Insurance Planning

Based on Arvind’s insurance policy details, it appears that life insurance requirement has been addressed. As, he has already held a pure term cover of Rs25 lakh, which is not sufficient to secure his family commitments and aspirations. He needs to increase his cover up to Rs85 lakh as his current requirement for life cover is Rs 1.10 crore. It’s recommended to buy an additional term cover of Rs85 lakh as required. It will cost around Rs10,000 based on online insurance provider and the plan chosen. Sunita needs also sufficient cover to protect her monthly income as she can buy a term cover of Rs40 lakh based on her income replacement approach.

Health insurance is also very important aspect in today’s world. The couple has already covered with Rs 4 lakh family floater plan from their respective companies. It’s recommended to buy for another family floater policy which would give enhanced cover and take are after their retirement at lower cost. They should buy Rs5 lakh family floater policy that would cover us and their children. It will cost around Rs8,000-Rs10,000 based on insurance provider and the plan chosen.

Fresh Investment Requirements

The couple has articulated their financial goals and aspirations based on their incomes and expenses. In the following table, couple would know that how each of their goal will be funded either from their current savings and assets or fresh investments.

Financial Goals

Funds Needed

Goal Year

Years for Goal

Future Value*

Monthly Investment Required

Ayushi’s   Education

10   Lakh

2028

14

 37.97 lakh

6,820

Anshit’s   Education

10   Lakh

2031

17

 50.54 lakh

5,240

Ayushi’s   Marriage

15   Lakh

2035

21

 75.50 lakh

7,240

Anshit’s   Marriage

12   Lakh

2039

25

 82.18 lakh

4,830

Upgrading   Car

7   lakh

2018

4

 9.52 lakh

5,400

Retirement   Corpus

12.48   lakh

2044

30

 2.04 crore

6,620

Total

36,150

*(Child’s education inflated at 10 % pa and marriage & other goals inflated at 8% p.a.)

Planning for Education

We assume that the total amount of Rs20 lakh required for both children’s education in today’s value will be spent equally on both when they will turn their age at 18. The amount required then will be Rs37.97 lakh for his daughter and Rs50.54 lakh for his son after providing for education inflation at the 10% per annum.

Arvind can accumulate the amount for his daughter by investing Rs5,000 p.m. in PPF for 9 year till 2023 and extending PPF account for a block of another 5 years till the year 2028, while computing investing Rs5,000 p.m. The existing PPF corpus of Rs 4.27 lakh along with future investment will grow to Rs. 30.46 lakh in 14 years. The remaining shortfall of Rs7.51 lakh in the education corpus can be accumulated by investing Rs1,820 per month in diversified equity mutual funds schemes.

For his daughter, the corpus of Rs50.54 lakh can be created by investing Rs6,370 per month along with growing of existing mutual fund investments of Rs2.60 lakh in diversified growth oriented fund for 17 years.

Planning for Marriage

It has been assumed that the total amount of Rs27 lakh required for marriage in today’s value, in which Rs15 lakh will be spent on Ayushi’s Marriage and Rs12 lakh on Anshit’s Marriage when they turn the ages at 25 and 26 years respectively. The amount required then will be Rs75.50 lakh for his daughter and Rs82.18 lakh for his son, one after taking inflation at the rate of 8% per annum into consideration.

Arvind can build up the corpus for this cause by investing Rs7,240 p.m. for 21 years for his daughter and Rs4,830 p.m. for 25 years for his son through SIP in diversified equity mutual funds.

Planning for Car

Arvind wants to get upgrade his old car with new one which is currently costing Rs7 lakh in the next 4 years. The amount is required then will be Rs9.52 lakh for the same car after consideration of rapid increasing cost of car year on year basis at the rate of 8% p.a. Since the goal is reaching in near term, he should start monthly recurring deposit of Rs5,400 in his bank and will be able to accumulate the  corpus of Rs9.52 lakh while taking consideration of his National Saving Certificates of Rs4 lakh is going to be maturing on 2018 and selling of existing car worth Rs1 lakh.

Planning for Retirement Corpus

The retirement is assumed at age 60 and investment of Rs6,620 in equity schemes, if  continued till retirement years(30 years), can create corpus of Rs 2.04 crore. This amount though seems quite big today, will be sufficient to take care up to assumed life expectancy till the age of 86 years. While planning the corpus of retirement, we did not utilize his existing and future contribution of provident fund so that his PF corpus will take care beyond his life expectancy age, if he were alive. That’s why we advise to create corpus more than required for the sunset years.

It is advised to review the plan for every six months and should keep annual provision of premium for financial plan in his cash flow statement.

This case study has got published in Business Bhaskar

 

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Suresh Kumar Narula

SEBI Investment Advisor, Founder & Principal Financial Planner at Prudent Financial Planners
Suresh K Narula is founder and Principal Financial Planner at Prudent Financial Planners. He has earned the professional CERITIFIED FINANCIAL PLANNER and got registered with SEBI as Investment Advisor. He writes on personal and financial planning articles and got published in Dainik Bhaskar, Business Bhaskar and The Financial Planner's Guild, India. He is also a member of Financial Planner's Guild India ( An association of practicing SEBI registered Investment advisers) to create awareness about Financial Planning in general public, promote professional excellence and ensure high quality practice standards. Suresh received his an M.com from Himachal Pardesh University and an MFC from Punjab University, Chandigarh. He can be reached at info@prudentfp.in
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