Financial Planning- Case Study
Sachin and Rashmi Saxena live in Jaipur and are working with private firms. Sachins monthly income is Rs 1 lakh and Rashmis Rs 40,000.They live in their own house. They have a daughter (3) and a son (2 months).They aim to accumulate a corpus for their kids higher education when they turn 21,followed by their marriages, and also a decent retirement corpus for themselves.
At current terms, the cost of education is Rs 25 lakh for each child, and the total wedding expenses are Rs 40 lakh.They have a home loan of Rs 32.50 lakh. They have no health insurance policy. Sachin has a life cover of Rs 1 lakh only through a money-back policy, while Rashmi has a term plan of Rs 1 crore.
Where they stand today
Cash flow:
Their gross annual income is Rs 16.80 lakh and total outflow is Rs 7.72 lakh, which includes household expenses, insurance premiums and home loan EMIs.
Net worth:
The total worth of their financial assets is over Rs 9 lakh Rs 50,000 in savings account, Rs 70,000 in FDs and Rs 8.50 lakh in PPF accounts.
They pay an EMI of Rs 33,000
on the home loan.
Planners recommendations
Contingency fund:
Their total liquid assets balance in savings account and FDs is worth Rs 1.20 lakh.They have a mandatory monthly expense of Rs 63,000.So the couple should have a contingency fund covering expenses of three-six months.
Health cover:
A health insurance provides financial risk coverage against most medical emergencies. The couple does not have any health policy. They should immediately buy a family floater health policy with a sum assured of Rs 5 lakh.
Life insurance:
Sachin has a total life cover of Rs 1 lakh. Considering their household expenses, financial goals and home loan, he should immediately buy a term policy for himself with a death benefit of Rs 1 crore. Rashmi has adequate life cover and should continue this policy.
Planning for financial Goals
Childrens education:
The couple wants to spend Rs 25 lakh (current cost) on each Childs education. At 10% annual inflation, the future cost of such education will be around Rs 1.85 crore at their respective ages of 21.One option for the couple is to aim for 60% self-funding and balance 40% through an education loan.Investing Rs 10,000 per month this year in a well diversified portfolio of equity and debt mutual fund and increasing the same by 10% every year can help them achieve the desired goals.
Childrens weddings:
The couple wants to spend Rs 40 lakh (current cost) for their childrens wedding. Considering an annual inflation of 7% on wedding costs, total corpus needed will be around Rs 2.17 crore after 25 years. Investing Rs 5,000 per month in a balanced mutual fund scheme this year and increasing the same by 10% every year can help them achieve their goal.
Retirement corpus:
Considering their present expenses and current inflationary trends, they will need a retirement nest egg of Rs 4 crore. They should invest Rs 1 lakh every year in their existing PPF accounts. They should also start investing Rs 6,000 in a diversified equity fund through the monthly SIP route, and increase the SIP amount every year by 10% to achieve the desired goal. They can reduce exposure in equity as they near their goal.
All names have been changed. Authored by Pankaj Mathpal. Published in Times of India on April 1, 2014.
