Early start, high savings will help achieve goals
The long
time available to them allows the Lahariyas to achieve all their financial
goals comfortably.
One of
Pankaj Lahariya's biggest regret is that he did not give much thought to his
finances when he started working seven years ago. “I squandered away the
advantage of starting early. I could have saved and invested a large chunk of
my income during those seven years,“ he says.Now 29, the Pune-based engineer
has a net worth just equal to his annual income. He has now resolved to
aggressively save and invest to reach his financial goals.
We don't
agree with Pankaj. True, he failed to capitalise on the high disposable income
in the early years. Even a modest `2,000 saved every month in an option that
earned 9% annually would have grown to `2.4 lakh in seven years. But Pankaj
still has more than 30 earning years ahead of him so the early bird advantage
is not really lost. He can still harness the power of compounding and build
significant wealth to achieve his goals.A lot of Indians don't realize the
importance of saving and investing till they are well into their 40s. Compared
to them, Pankaj's financial plan is on a strong footing.
Pankaj,
an engineer in a telecom firm, lives in Pune with his 26-year-old homemaker
wife Ranu and one-year-old daughter Kyra.He brings home a net salary of
`34,000. Of this, `15,583 goes into household expenses.Another `7,775 is paid
every month on average as life insurance premium. That leaves the family with a
monthly surplus of `10,642.
The
Lahariyas have a small but diversified portfolio. Pankaj invests in stocks
through equity funds and a Ulip, has recently started a recurring deposit and
about 20% of the portfolio is in gold jewellery. Pankaj has `2 lakh in his EPF
account and about `50,000 is lying in a savings bank account.
The first
thing to do is create an emergency fund worth six months' expenses. The Ulip in
their portfolio can be used for this. To ensure that the fund value does not
fall, Pankaj should switch the corpus to the debt fund in the plan.
Insurance coverage
Pankaj is
the sole breadwinner so life insurance is critical for his family's financial
future. Unfortunately, though he pours `93,000 into five insurance policies
every year, they give him a combined cover of only `10 lakh. Financial planner
Pankaaj Maalde suggests that he should let two of the high cost plans to lapse.
“It is painful to forget the `58,000 already paid on the plans but they offer
5-5.5% returns which won't beat inflation. It is important to take these
corrective steps at this stage,“ he says. The funds freed up by the closure of
these two policies can be diverted to more lucrative investments.
For his
life cover, Pankaj should buy an online term insurance plan of `50 lakh. It
would cost him around `6,000 a year. Maalde warns that Pankaj should disclose
all the facts, especially his social habits (he smokes) and other insurance
policies, in the form. Incorrect disclosures can fetch you a lower premium but
could pose serious problems for the nominees when they make a claim.
The
Lahariyas have not bought health insurance and depend solely on the `3 lakh
group floater cover provided by Pankaj's employer. This might not be adequate
so Maalde suggests they should buy an additional health cover of `5 lakh. It
will cost them around `7,000 a year. Pankaj should also consider buying a
personal accident and disability cover of `25 lakh. It would cost him around
`3,000 a year.
Investing for goals
The
Lahariyas have a mix of short term and long term goals. They want to renovate
their house and need about `5 lakh for this in about three years' time. Pankaj
recently started putting `10,000 a month in a 3-year recurring deposit. That
would grow to `3.9 lakh in three years. The balance `1 lakh will come from
maturity of an insurance plan in 2017.
For
Kyra's higher education, they will need `37 lakh in 17 years. They can use the
`18,000 invested in equity funds. The cash in the bank should also be ploughed
into equity funds. In 17 years, these would grow to `5.43 lakh. For the balance
`31.57 lakh, they need to invest `4,500 a month in equity funds.
The
Lahariyas have estimated that her marriage would cost `67 lakh in 25 years. For
this they need to save `4,000 a month in an equity fund and `1,000 a month in a
gold fund.But given their low surplus, this may not be possible immediately.
They can start saving for this goal after the house renovation is completed.
Retirement planning
Their
retirement planning will also have to wait for some time. Assuming that
inflation would have pushed up their monthly household expenses to almost `2
lakh in 31 years, the couple needs around `4.7 crore to sustain them till the
age of 80. If Pankaj continues investing in the EPF, he will have around `87
lakh in it by the time he retires. For the rest, they will have to put `11,500
a month in an equity fund. But this can start only after the insurance policies
are closed down and the home renovation is done.
