Low surplus to act as a spoke in the wheel
The
Alams will have to forgo or postpone some of their goals due to the low income
and investible amount. They will also need to enhance their equity exposure and
risk coverage.
Proverbial wisdom often comes in handy
while dealing with one's finances. `A job well begun is half done' is an adage
that is particularly relevant. If you start planning your finances when you
begin earning, you can be assured of a smooth journey and comfortable
retirement. However, despite the best of intentions, a low income or an
insufficient investible surplus can put a spoke in the wheel. Take the case of
the Pune-based Alams. Though they have begun planning at the right time, in
their late 20s, their low surplus means that they will have to put off some of
their more important goals till a rise in income. Still, they can hope to
fulfill the crucial ones given the long time horizon.
Existing financial status
Mohammad
Jaid Alam is a 27-year-old engineer, who draws a salary of `51,000 per month.
He stays in Pune with his 25-year-old wife, Heena, who is a homemaker. A bulky
`39,875 is spent on household expenses, with a big chunk of `17,000 going as
house rent. Another `2,500 goes as premium for insurance, bringing the total
outgo to `42,375. This leaves them with an investible surplus of `8,625, which
will be insufficient in meeting all their goals.
The
Alams' goals include building a contingency fund, buying a house, and planning
for their retirement. Though they don't have a child as of now, they want to
start planning for the education and marriage of their progeny too.
The
Alams expectedly have a low net worth and their portfolio is skewed heavily
towards debt and cash, with a negligible exposure to equity. Since the couple
is planning to buy a house shortly, raising their debt portion, they will have
to increase their equity investment later if they want to meet their goals.
Insurance coverage
Before
Pankaaj Maalde of Apnapaisa.com charts a financial course for them, he wants to
assess their insurance needs because it is an essential component of any
portfolio.
The
Alams currently have one Ulip, which offers a life cover or `3 lakh to Mohammad
Jaid, and for which he is paying a monthly premium of `2,500. Since it is not
advisable to retain this expensive policy for a minuscule cover, Maalde
suggests that they discontinue the premium. The amount will be invested in the
discontinuance fund after 30 days of the next due date for premium payment. Earning
an interest of 3.5%, this fund will be paid to the couple at the end of the
fifth policy year after deducting the discontinuance charge.
In
its place, Mohammad Jaid should buy a life cover of `1 crore for 35 years,
which will cost him `7,000 annually. Since Heena does not work, she does not
require any life insurance.
As
for health insurance, Mohammad Jaid and his family are currently covered by his
employer for `4.5 lakh. This is sufficient for them at this stage, but whenever
he can afford it, Mohammad Jaid should buy a top-up plan since it is not
advisable to rely solely on the employer's cover. He should also purchase an
accident disability cover worth `50 lakh when there is a rise in income. It
will cost them `7,000 annually.
Road map for the future
Moving
on to the family's goals, the Alams need to have a contingency fund worth six
months' expenses, which will amount to nearly `3 lakh. Though the couple has
`85,500 in cash, it has not been earmarked for emergencies. So, the couple is
advised to allocate this amount to the contingency fund, along with the `1.96
lakh in stocks. This will amount to `2.8 lakh, which should serve the purpose
of an emergency fund. Next, the couple wants to buy a house worth `45 lakh in a
year's time. For this, they are planning to take a loan of `15 lakh from their
parents. For the remaining amount, they will have to take a home loan, for
which the instalment will come to `26,600 at the rate of 10.15%. This can be
managed only when the Alams shift into their new house and stop paying the rent
of `17,000. Along with the surplus of `8,625, they will be able to shell out
the EMI.
However,
this also means that they will have to put off their remaining crucial goals,
which include building a retirement corpus and funding their future child's
education and marriage.
For
their retirement, they are estimated to require `8.3 crore in 33 years. While
Mohammad Jaid's EPF contribution will amount to `1.3 crore, he will have to
make a fresh investment of `12,000 in an equity mutual fund through the
systematic investment plan (SIP) to achieve the desired amount in the specified
time frame. However, this will be possible only if they have the surplus after
a rise in Mohammad Jaid's income. After they are through with paying the home
loan, they can also consider reverse mortgaging the house for their retirement
needs, if they fall short of funds. Besides, assuming that they save `2 lakh as
tax on home loan, they can start investing in an equity-linked savings scheme.
Similarly,
for their child-related goals, as well as the other discretionary goals, which
include buying a car and going on a foreign vacation, the Alams will have to
wait till they can fund these. For now, they should try to optimise their
savings and consider ways of increasing their income.
