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Proud Parent

Client's Case

Bimal Kumar, Indore, 35 years, married with one daughter 2 years, spouse is housewife, works at a telecom company, Rs 7 Lakh income, wants to buy a house. 8 lakhs in savings account, 2 lakhs in PF balance

Our Recommendations

• You need to take care of 2 dependants: Yours is the sole income in your family that needs to support the needs of your wife and daughter as well. Currently, your daughter is only 2 years, but soon she will start going to school, so her expenses will also go up. Everything you should think of should relate to your family situation

• Do you have adequate life insurance: In order to offer your dependants the same lifestyle that they are used to right now in case something happens to you, you must ensure that you are adequately insured. It is recommended that you should have at least 10x-15x your income after tax as life coverage. Therefore, the sum assured you want is at a minimum of 50 lakhs. You should get term insurance for this amount. It will cost you around Rs 300/Lakh of sum assured or around Rs.15,000 per year.

• Health insurance:. Buy a health insurance plan or mediclaim policy that covers your entire family. For a Rs.3 Lakh coverage, you will pay around Rs 4,000 for the entire family. Under Section 80d this gives you Rs.4,000 deduction on your taxable income.

• Foundation Goal – Home purchase: Your income of Rs 7 Lakh suggests that you should be able to buy a house worth approximately Rs 30 – 35 Lakhs, as you can get a home for upto 5x your income. You should however consider buying a house of around Rs. 25 lakhs considering your financial situation. The home loan amount will usually be about 75%-80% of the property value. In the current home loan interest rate environment, for a loan of Rs. 20 lakhs for 20 years, the EMI will be around Rs 21,000. For the down-payment of Rs. 5 lacs on your loan you can use part of the Rs. 8 lacs in your savings account.

• Foundation Goal – Daughter’s higher education: Goal is about 16 years away. You should start saving today itself. Cost of education is rising quite fast, around 10% per annum. Three years in a private college could cost approximately Rs 15 Lakhs when your daughter is ready to join college. So, save regularly today so that you can get returns regularly to grow this corpus to get to Rs 15 Lakhs.

• Lifestyle Goal – Daughter’s wedding: Like for education you need to start saving from today itself. However, the kind of wedding you have and its costs depends upon how much you want to spend.

• Retirement Planning- At present you have a PF balance of Rs. 2lacs and you are contributing around Rs.20,000 annually. This should give you a corpus of Rs. 28 lacs at retirement, 25 years from now at a rate of return of 8% per year. To maintain your current lifestyle till age 80 you need about Rs. 1.2 crores at retirement. So you need to start saving to cover the gap.

• Investment planning: For the above goals, choose a conservative strategy for your investment planning with a healthy balance of diversified large cap equity and debt funds. You should expect an average return of at least 8%-12% on your portfolio. So, all your monthly savings, estimated at around Rs.8,000 can get invested through a SIP. In addition you should consider moving Rs. 2 lacs from your low return (3.5%) savings account to a liquid fund that gives you around 6% per year without compromising on liquidity. The remaining Rs. 1 lac in the savings account can be invested lump sum in a debt/equity fund and these will earn an annual return as well.

• Risk: You should not think about aggressive investment strategies because you are saving for important foundation goals.

• Time horizon: You have one short term goal of buying a home, two long-term goals for your daughter’s education and wedding and your retirement planning goal.

• Liquidity: The liquid fund investment of around Rs. 2 Lakhs is for emergencies. Use part of your balance in the savings account for cash down payment for your home purchase. Other than that you do not have immediate liquidity needs.

• Tax planning: Your tax liability is around Rs. 1,70,000. You should make sure that you are taking advantage of your 80c benefits of upto Rs. 1 lac. This can save around Rs. 30,000 in taxes. You are already getting a benefit of Rs. 20,000 on your PF contribution so can invest part of your your suggested SIP in an ELSS to get the remaining benefit of Rs.80,000.

• Wills and estate planning: You are still young and your asset formation is not complete. Maybe you will expand the size of your family as well. It might be early for you to think about a will. But, when your family size is complete and you have accumulated all your assets, it is advisable to write and execute a will

Your current savings will not enable you to fully achieve all your goals but this is an important start. As your salary increases and you can save more, you will start getting closer and closer to your goals

(A complete financial plan involves more detailed analysis and recommendations. The Financial Planning page has two free sample financial plans, financial plan1 and financial plan 2  for you to download. Names and other personal details have been changed in above story and sample plans to maintain confidentiality of our clients)