No investments,high liability make for a bad plan
Low income,coupled with expensive loans and rejection of equity,means that the
Kumars will have to put most of their financial plans on hold till they pay off
their debts.
SAKINA BABWANI
Its a good thing Phani Kumar is only 29.It may be the only redeeming factor for
a person whose net worth is 6.84 lakh in the negative.Or the fact that despite
a moderate salary of 45,000,he has taken three loans,has invested only in
debt,with not a shred of equity,and has no insurance,life or health.In a
financial scape that reeks so heavily of indiscretions,the only wise move Kumar
seems to have made is in soliciting financial advice at this stage in his
life.He needs it,and will have to make tough decisions and take radical steps
if he wants a smooth journey that will see the fulfilment of his financial
goals.Fortunately,he has realistic goalssons education,buying a house and
building a corpus for retirement.
Kumar,a software engineer,lives with his 24-year-old wife Rajitha,a
homemaker,in Hyderabad.They have a four-month-old son,Mokshagna,and Kumars
45-year-old mother Padma is also dependent on him.While they spend a reasonable
18,500 on household expenses,a major portion of Kumars income goes into
servicing his three loanstwo personal loans and one car loan.He shells out a
combined EMI of 18,084,with 6,384 being the monthly instalment for the car
loan.The outstanding car loan is 2.84 lakh and will last another
three-and-a-half years.The EMIs for his personal loans are 11,700,which he has
to service for another five years.Since the interest rate on these loans is as
high as 12.5% and14.25%,respectively,Kumars priority should be to pay them off
as soon as he can.More importantly,servicing the loans leaves him with a measly
surplus 8,416 every month,an amount highly insufficient to plan his goals.
Another problem that the Kumars need to rectify is their asset
allocation.Currently,they have chosen debt as their preferred asset
class,stacking the entire 100% of their portfolio in it.Though debt instruments
are relatively safe,they require equity to propel their portfolio so that they
can fund their goals adequately.I avoided equity because of my
responsibilities.At this stage,I did not want to take any kind of risk, says
Kumar.
Before we offer ways to clear his loans,Kumar should tackle the biggest
problemlack of life insurance.Being the sole earning member of his family,he
needs to ensure that his dependants are adequately protected.Theres a reason
Kumar doesnt have life insurance;hes diabetic and,hence,has been unable to
procure an online life insurance.Given his medical condition,Pankaaj Maalde of
Apnapaisa.comadvises that he settle for an offline term plan of 50 lakh from
LIC.This will cost him 1,334 a month.He should make sure that he discloses all
facts about his own and familys health history in the proposal form
correctly,besides mentioning the rejection of insurance proposals in the
past.This will ensure a smooth claim process later.As Rajitha is a homemaker,she
does not require life insurance.
Next,Kumar needs to sort out his health insurance.Currently,he depends on the 4
lakh insurance provided by his employer.Maalde advises that Kumar use this
policy for himself and buy individual plans of 3 lakh for his wife,son and
mother.These additional insurance plans will cost him nearly 1,167 every
month.Once insurance is taken care of,Kumar should build an emergency corpus
that is equivalent to six months expenses.Currently,he does not have any cash
with him.Hence,he should start a recurring deposit of 5,000 every month for a
period of four years.This will help build 2.34 lakh,which should be kept aside
to meet emergency expenses.
Once his insurance and emergency expenses are taken care of,Kumar can start
planning for his goals.However,given his current situation,it is not possible
for him to build a sufficient corpus to fund any of his goals.So,he will have
to wait till his loans are cleared.After that,he will have to review his
financial status to see how he can fund his top priority,which is to buy a
house worth 50 lakh in five years.
Maalde feels that Kumars priority should be planning for his retirement.Kumar
will need 6.35 crore after 31 years for meeting his postretirement expenses.His
EPF investment will generate 1.31 crore,assuming a growth rate of 8% every
year,which can be added to the retirement kitty.For the remaining 5.04
crore,Kumar will have to start a monthly SIP of 13,200 in equity and gold funds
in the ratio of 90:10.Assuming a growth rate of 14.3%,the funds will generate
the desired corpus within the allotted time frame.However,he can start funding
for this goal only after four years,when he will have paid off some of his
loans.
Kumar also needs to accumulate funds for his sons education,for which he will
require 1 crore after 18 years.Again,he cannot start investing for this goal
till he repays his loans as he does not have adequate surplus.After four
years,Kumar will have to start a monthly SIP of 19,000 in equity and debt funds
in the ratio of 90:10.The funds will generate the desired corpus within the
given time frame,assuming a growth rate of 14.3%.
Currently,Kumars main focus should be to repay his loans that are impinging on
his financial freedom.While he does this,Kumar should remember to pay his EMIs
on time in order to maintain a good credit score.Once his loans are repaid,it
will free 18,804 every month,which can be redirected towards his various
goals.Besides,he will also have set up an emergency corpus and can channelise
5,000 as well for his goals.The deficit can be taken care of by the increase in
his salary in five years.However,he must ensure that his expenses do not
increase in an unplanned manner.
KUMARS GOOD MOVES ...
Maintaining
a healthy rate of saving.
Starting with financial planning at an early stage.
AND THE BAD ONES
Having absolutely no investments.
Having inadequate health cover,and having no life insurance.
Going in for too many loans at a high interest rate.
RECOMMENDATIONS
INSURANCE
Advice:
LIC term plan (offline).Apollo Munichs Easy Health Standard Plan (health).
Rationale:
Considering that Kumar has diabetes,he will have to opt for an offline term
plan even though it is expensive.The health cover of 3 lakh is for each family
member.Kumar can use his employers insurance for himself till his income rises.
Financial plan by Pankaaj Maalde,CFP,Head,Financial
Planning,Apnapaisa.com
