High income and
few goals help Sens overcome mistakes
By Amit Kumar, ET Bureau | 27 Jan, 2014,
A
high monthly income may not be the panacea for all your financial troubles, but
it does help. You will still need to make the right financial decisions and
invest in the right instruments, but high income can ensure that the past
mistakes are rectified with minimum damage to your portfolio.For the Sens, a
couple in their early 30s, finding the money to invest is not a challenge since
they have just one goal and nearly 27 years of working life ahead. As their best investment years are still
to come, Pankaaj Maalde of Apnapaisa.com has worked out a strategy to get rid
of the flab in their portfolio.
Arijit
Sen, 33, works with a bank in Mumbai, where he stays with his wife, Komal, 31,
and mother, Maya, 62. Arijit brings in a handsome salary of Rs 1.5 lakh a
month, while Komal earns Rs 25,000 per month as a teacher. After accounting for all their expenses,
they are left with a huge surplus of Rs 64,583 per month. About Rs 60,000 is spent monthly on rent and household
expenses, while Rs 30,000 is paid as an EMI for a personal loan. The couple pays a high interest rate of about 14% per
annum and has nearly four years of repayment to go. Maalde suggests that the couple should get rid
of the loan as early as possible since the rate of interest is higher than the
potential return from viable investments.
The Sens will also need to rebalance their insurance portfolio and set up a contingency fund before they look at wealth creation. They have been lackadaisical about buying health insurance and, as of now, Arijit's employer reimburses 80% of their medical bills. Since Maalde thinks this is inadequate, he recommends individual health covers of Rs 3 lakh for both, along with a top-up plan of Rs 10 lakh, with a deductible of Rs 3 lakh. This will cost the couple about Rs 16,000 per annum. Arijit is also advised to buy an accident disability insurance and critical illness cover of Rs 50 lakh, which will cost them about Rs 21,000 per annum.
The Sens will also need to rebalance their insurance portfolio and set up a contingency fund before they look at wealth creation. They have been lackadaisical about buying health insurance and, as of now, Arijit's employer reimburses 80% of their medical bills. Since Maalde thinks this is inadequate, he recommends individual health covers of Rs 3 lakh for both, along with a top-up plan of Rs 10 lakh, with a deductible of Rs 3 lakh. This will cost the couple about Rs 16,000 per annum. Arijit is also advised to buy an accident disability insurance and critical illness cover of Rs 50 lakh, which will cost them about Rs 21,000 per annum.
Since
Arijit's mother is a senior citizen and buying a separate cover for her will be
expensive, Maalde suggests building a separate medical emergency fund of Rs 3
lakh for her. The couple must also build a contingency fund
equivalent to three months' expenses. Given their current monthly expenditure
of about Rs 70,250 (after recommendations), the couple can allocate the cash
balance and bank fixed deposit of Rs 2 lakh for this. For the remaining amount, they can allocate their
monthly surplus to this goal once they repay their personal loan.
The only current concern for the Sens, as pointed out earlier, is the high interest being paid on the personal loan. Besides the imprudent move of having taken a personal loan, the couple has made yet another wrong choice. They have bought an expensive traditional insurance policy from LIC. The LIC Jeevan Anand plan costs Rs 1.25 lakh per annum for a cover of Rs 25 lakh. The rate of return on the plan, after considering the current surrender value, future premium and expected maturity based on the current bonus rates, is unlikely to be more than 7%. Since they are furnishing a loan that is far more expensive, Maalde suggests the couple surrender the plan and use Rs 7 lakh to repay the loan immediately. In its place, the couple should buy an online term plan of Rs 2 crore, which is expected to cost them about Rs 20,000 per annum. Despite the added covers, the couple will save Rs 5,667 per month on insurance.
The only current concern for the Sens, as pointed out earlier, is the high interest being paid on the personal loan. Besides the imprudent move of having taken a personal loan, the couple has made yet another wrong choice. They have bought an expensive traditional insurance policy from LIC. The LIC Jeevan Anand plan costs Rs 1.25 lakh per annum for a cover of Rs 25 lakh. The rate of return on the plan, after considering the current surrender value, future premium and expected maturity based on the current bonus rates, is unlikely to be more than 7%. Since they are furnishing a loan that is far more expensive, Maalde suggests the couple surrender the plan and use Rs 7 lakh to repay the loan immediately. In its place, the couple should buy an online term plan of Rs 2 crore, which is expected to cost them about Rs 20,000 per annum. Despite the added covers, the couple will save Rs 5,667 per month on insurance.
Along
with Rs 7 lakh that they receive as insurance proceeds, the Sens must redirect
their surplus of Rs 70,000 per month after the recommendations, to pay off the
loan as quickly as possible. This surplus, with the EMI of Rs 30,000, will help
repay the loan in about three months. After this, the couple's surplus will
rise to about Rs 1 lakh, and this must be used to build their contingency fund
in the next three months. The couple can then start planning for their goals.
As of now, the couple has only one goal: to build a
retirement corpus of Rs 10.5 crore after 27 years. For this, their EPF savings
will contribute Rs 4 crore to the corpus, while the remaining amount will have
to be built by starting SIPs of Rs 26,000 per month in equity funds. This will
help them accumulate the desired surplus. Once
the couple pays off the loan and builds the contingency fund, they will have
nearly Rs 1 lakh as monthly surplus. Of this, Rs 26,000 can be invested per
month for the retirement corpus and the remaining can be invested through SIPs
in balanced funds for the time being.
Currently, the couple have no children and, hence,
have not yet planned for their education and marriage corpuses. However, Maalde recommends that they start with the
process of wealth creation from next year onwards and invest this surplus in
balanced funds through monthly SIPs. Arijit also gets about Rs 2 lakh as yearly
bonus, and this can also be used for building wealth. Besides this, the couple
can invest a portion of the monthly surplus in a short-term debt fund if they
want to save for a short-term goal like planning a vacation or buying a car.
Financial plan by Pankaaj Maalde, CFP. www.apnapaisa.com
