Certified financial planner and wealth advisor Gaurav Mashruwala comments on Anil and Ruchira's financial position.
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Anil and Ruchira's profile and lifestyle: Have money and love to spend?
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Expenses and investments: Where their money goes.....
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What they are saving for: Anil and Ruchira's goals
It often happens an individual has a totally different financial upbringing than his/ her spouse. Anil and Ruchira are a case in point.
The value of money was inculcated in Anil since childhood, though I have to suspect it was more implied than impressed upon. Since there was certain amount of scarcity, budgeting and saving was needed by default.
Ruchira, on the other hand, was born with a silver spoon in her mouth. Her only relationship with money was that of spending.
What was lacking in both cases, and has been carried forward in their marriage, is structured money management. While Anil's habit of budgeting has helped them keep a tab on spending and, to some extent, modified their lifestyle, in most other instances they struggle.
Like any couple, they want to save for their child's education and marriage and their own retirement. They have not voiced any other aspirations of buying a luxury car or holidaying abroad.
The good news is that this couple has a focused approach to their financial goals. They also run a budget regularly. What is needed is control of debt and sound money management. Age is on their side and, with no other expensive dreams and aspirations, they will sail through their financial life if they make optimum use of financial resources.
Contingency Reserve
Today: Rs 50,000 in a savings bank account and fixed deposit. This is equivalent to about five to six weeks monthly expenses. They want to increase this amount to Rs 1,25,000.
Advice: The contingency reserve is insufficient. They should ensure a contingency reserve equal to three month's household expenses. If you take their Equated Monthly Installments on their loans, the sum would be fairly higher. Over a period of time, as and when the loans get paid off, this reserve amount can be reduced.
Health Insurance
Today: Anil's company provides them with health cover up to Rs 3,00,000
Advice: They must read the complete policy details of this cover and see what is covered and what is not.
Life Insurance
Today: Anil has a life cover of approximately Rs 15,00,000 while Ruchira has cover of Rs 75,000
Advice: Since insurance is bought from an investment perspective, the actual life cover is very low. In the case of the untimely demise of the main earning member (Anil), the proceeds from life insurance are not even sufficient to meet the outstanding loans.
Anil needs to opt for term insurance to the tune of Rs 40 lakh (Rs 4 million). Ruchira does not need to be insured as she is not contributing towards the household expenses.
Borrowing
Today: The couple has five loans: Home, plot, computer, two personal loans.
Advice: Of the total monthly inflow of Rs 48,000, Rs 40,000 is being spent on routine expenses including the EMI. In fact, more than 40% of the take-home pay is being utilised to pay EMIs. Outstanding principal liability of the loans are almost 45% of total assets.
Both these indicate the loan component is more than ideally recommended, though it isn't alarming as yet. However, since Anil is sole regular earning member, they need to be extra cautious.
Savings & Investment
Today: Most of the portfolio is in illiquid investments like NSC, infrastructure bonds, a plot of land and Equity Linked Saving Schemes.
Some of the investment are in semi-liquid insurance vehicles like a moneyback or endowment policy.
Insurance is not the ideal investment vehicle. Since expenses deducted from the premium paid are higher compared to other investment vehicles, returns from insurance are poorer. To add to it, the couple has a majority of their investment in debt based, illiquid instruments.
The only liquid assets they have are a savings account, fixed deposit and a diversified equity fund.
This is how I suggest they should save given their goals.
Goal: Rs 60,000 for the birth of their child within a year's time
Advice: Set aside Rs 5,000 in a debt based mutual fund every month for next 12 months.
Goal: Rs 80,000 for school admission in four years
Advice: Use the maturity proceeds of NSC, infrastructure bonds and the payout from the moneyback policy.
Goal: Rs 50 lakh (Rs 5 million) for the child's higher education within 20 years
Advice: Invest in a large-cap diversified equity fund through a Systematic Investment Plan.
At an assumed annualised return of 15%, Rs 3,500 every month is sufficient.
Goal: Rs 50 lakh for their child's marriage in 26 years
Advice: Choose a mid- or small-cap diversified equity fund and invest Rs 1,350 every month (at an assumed annualised return 15%).
Buy 5 gms of gold every year -- maybe on your wedding anniversary or birthdays. Over next 26 years, 390 gms of gold would be accumulated which can then be utilised during the marriage.
Goal: Rs 15 crore (Rs 150 million) for their retirement in 30 years.
Advice: The required sum is equivalent to today's Rs 1.50 crore (Rs 10.5 million) at 8% inflation. This is too large an amount.
Current annual expenditure at about Rs 3,00,000 (excluding EMIs) is Rs 25,000 per month. This will be equivalent to Rs 2,51,000 per month after 30 years. Therefore, Rs 15 crore is on the higher side.
An amount in the region of Rs 4 to 5 crore (Rs 40 to 50 million) as per their current life style is a more realistic figure.
However, to get Rs 15 crore, Rs 21,500 should be invested every month in a diversified equity fund for next 30 years.
Also, the contribution to Public Provident Fund should be made regularly.
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