Getting rid of high debt can help reach goals
To ensure a smooth financial ride, the Varmas
must quickly repay their costly personal loans as also correct the skew towards
real estate in their overall investment portfolio.
A heavily skewed portfolio and expensive loans
have the potential to neutralise all the positives in an investor's portfolio.
Hyderabad-based Varmas have done just that. They have three loans that they are
currently repaying, as well as a portfolio that has 78% real estate.Yet, the
fact that they are keen to get their finances on track and have sought
professional advice will help them rectify the flaws and set them on the right
course. Financial adviser Pankaaj Maalde will help them do this by overhauling
their loan and insurance baskets and preparing a plan that will serve as a
guideline for the future.Existing financial status Surya Varma is 35 and lives
with his 30-yearold wife Swarna, five-year-old daughter Ruthika and 52-year-old
mother, in Hyderabad. Both of them are employed and bring in a combined monthly
salary of `99,000, with Surya earning `64,000 and Swarna getting `35,000.
Combined with a rental of `6,500 from one of their flats, the total income
comes to `1.05 lakh. The Varmas have two houses and two plots of land which are
combinedly worth `35 lakh.
As for their monthly outgo, household expenses
account for `15,000, while `10,000 is paid as rent. Another `10,500 goes for
Ruthika's education and `5,333 as insurance premium. A big drain on their
income is `35,200 that is paid as EMIs for the three loans--one for car and two
personal-that they have taken. After accounting for all these, they are left
with a surplus of `29,467, which needs to be used judiciously to reach all
their goals. The financial targets include building a contingency corpus,
constructing a house, saving money for their daughter's education and wedding,
as well as for their own retirement.
To be able to achieve all these goals, the
Varmas require a much larger investible surplus and Maalde suggests that they
revamp their loan and insurance portfolios. He begins by assessing their
insurance needs.Insurance portfolio Surya currently has one traditional plan
and two Ulips, which cover him for a measly `7 lakh. Maalde suggests that he
surrender all three since they don't promise good returns, and it will result
in a surrender value of `3 lakh. Since the couple has inadequate life
insurance, Surya is advised to buy an online term plan worth `50 lakh and
Swarna a term plan of `25 lakh, both of which will result in an annual premium
of `11,000.
As for health insurance, Surya has a cover
provided by his employer, but this is not enough and he should buy a family
floater plan worth `10 lakh for the family. He should also purchase a `3 lakh
cover for his mother.These will cost him `28,000 per annum.Besides these, Surya
should also consider buying `25 lakh accident disability and `25 lakh critical
illness plans, which will cost around `12,000 a year. Combinedly, all the new
plans will result in a monthly premium of `4,250 which means they don't have to
bear any additional cost after surrendering the earlier policies.Road map for
the future Before preparing a plan to achieve the goals, Maalde suggests that
the Varmas repay all their expensive loans to free up a sum of `35,200, which
is currently going as EMIs.This will increase the investible surplus to
`59,250, including `1,083 that they save on insurance premium. They can close
the loans by selling one of their flats, which is worth `15 lakh, as it will
take care of all three loans, the outstanding amounts for which are `3.1 lakh,
`3.25 lakh, and `6.25 lakh. After this, the Varmas can start planning for their
goals.
To begin with, the Varmas need a contingency
corpus of `2.4 lakh, which is equal to their six months' expenses. This can be
easily sourced from the remaining proceeds of the flat's sale. Besides this,
they can also allocate `30,000 that the couple has as cash in their bank. After
this, they can move on to the next goal of constructing a house in five years on
one of their plots of land. This will cost them `64.5 lakh and they want to
create a corpus of `30 lakh in the given period. To do this, Maalde suggests
they allocate their other plot and the surrender value of Ulips.The latter
should be invested in balanced mutual funds. Additionally, they will need to
start an SIP of `25,000 in a balanced fund to be able to amass `30 lakh. For
the remaining `34.5 lakh, they will have to take a loan, which will result in
an EMI of `33,300 at an interest rate of 10%. This can be sourced from the
surplus of `25,000 and the `10,000 they save on rent.
Next, they want to save for the education and
wedding of their daughter. For the former, they have estimated a need of `27
lakh in 13 years. For this, no existing resource has been allocated and they
will have to start an SIP of `7,000 in an equity fund. For the goal of
Ruthika's wedding, the couple has calculated an amount of `93 lakh in about 20
years. Again, no existing resource has been assigned and they will need to
start SIPs of `7,000 and `3,000 in an equity and gold fund, respectively, to be
able to collect the required amount.
Finally, they are left with the most important
goal of retirement, for which they will require `4.7 crore in 25 years from
now. This kitty should help them sustain their current lifestyle till the time
Swarna is 80 years old.To be able to build this corpus, and taking into account
an inflation of 8%, the couple will have to allocate their EPF amount, which is
likely to yield `85 lakh in the specified period. However, they will also need
to start an SIP of `17,000 in an equity mutual fund to be able to amass the
given sum. Any rise in income in the future can be used for the existing goals
or any other requirement according to their priority
Financial plan by Pankaaj Maalde, Certified
Financial Planner
