Plan Wisely to Stay Financially Fit

Shivprakash Yadav, 26, teaches in a central government school in Daman and his wife Riya is a homemaker. The couple is about to start saving and investing for their future goals. Yadav has an annual take-home income of Rs 6.24 lakh while the family's annual expenses, including insurance premiums, amount to Rs 3.44 lakh (see table Assets, Liabilities and Networth). Yadav wants to buy a house in three years, save for his child's education and have enough funds to lead a comfortable life post-retirement. Here is how he can achieve immediate and long-term financial goals.

Immediate Goals

Contingency fund: Yadav must build a contingency fund that will cover the family's expenses for three months. His savings in the bank and the cash earmarked for this purpose add up to Rs 26,300. The gap has to be filled through regular, systematic investments in ultra-short-term liquid mutual funds. This fund should not be used for any other purpose as the key to financial success is discipline.

Life insurance: Yadav holds an LIC savings-cum-insurance product, but this alone will not fulfil the family's overall insurance requirement. So, he should buy a term plan of Rs 1.5 crore that will meet all future expenses (if required) and also protect other critical goals such as their child's education. Getting a term plan is the most cost-effective way of acquiring the required coverage. Yadav will have to pay about Rs 15,000 a year, and it can be claimed as a tax deduction under section 80C of the Income Tax Act.Health and disability insurance: As Yadav is a central government employee, he and his spouse are currently covered under the Central Government Health Scheme. Even then, each should get a personal health cover of Rs 3 lakh. It can be deferred for some time, though, till they have complete clarity regarding the quantum of coverage available during employment and also after retirement.

Yadav should also buy a critical illness cover of Rs 15 lakh for the couple and an accident disability cover of Rs 25 lakh for himself, which will cost around Rs 14,000 per year. However, premiums paid towards health insurance and critical illness cover can be claimed as deductions under section 80D of the Income Tax Act. At the time of buying an insurance policy, disclose all information to avoid future complications. Here we are assuming that the income surplus generated during the next few months will be utilised to purchase all recommended insurances.

Long-term Targets

Now that the immediate goals have been taken care of, Yadav must look at the long-term targets and start investing accordingly (see tables Financial Goals and Current Cash Flow & Recommended Allocations).

Retirement: Retirement planning in India is not an easy job, given the falling interest rates and slowing economic growth. However, this goal should never be compromised. Yadav wants to retire at 49, but there is a need to postpone it till 60 so that he can tick off all major goals and build the necessary retirement corpus. The couple will require Rs 4.8 crore after retirement assuming that the husband will live until 85 while the wife's life expectancy is 90 years and household expenses will be Rs 25,000 per month in present terms plus 6 per cent inflation.

To build this corpus, Yadav currently invests Rs 60,000 a year in the Public Provident Fund (PPF). This amount plus the pension income from the government will fund a portion of his requirement, but he should also invest part of the income surplus till he retires to fill the gap. We recommend an additional saving of Rs 10,600 a month starting from January 2022 after Yadav saves enough money to fund a property purchase (more on that later) in 2021. In fact, with focus on building the contingency fund and ensuring portfolio liquidity for property buying, he will have to reduce his annual contribution to PPF for the next four-five years. Post that, the investment value must increase by 5 per cent annually.

Child's education and marriage: As of now, the couple has no children, but they are ready to start saving for this future requirement. But based on their current cash flow, they may have to reduce the corpus from Rs 10 lakh to Rs 5 lakh in each case.

To meet these goals, Yadav should invest in mutual funds via two monthly SIPs - one of Rs 2,800 (from 2018 to 2035) for the child's education and another of Rs 2,000 (from 2019 to 2038) for his/her marriage. These investments should be increased annually by 10 per cent and 5 per cent, respectively. Investments in diversified equity mutual funds can be considered for the purpose.

Property purchase: Yadav, along with his father and brother, is looking to invest in a property. He wants to contribute 35 per cent of the property value - Rs 28 lakh out of Rs 80 lakh. But due to cash flow restraints and growing investment requirements to fulfil other goals, he can only contribute 20 per cent as down payment and the rest will be obtained through a loan. For this purpose, Yadav must start a monthly SIP of Rs 10,800 this year and continue till 2021, increasing the sum by 15 per cent every year. The money should be put in a combination of hybrid and debt mutual fund schemes. In case a larger amount is needed, it will affect his future goals such as funding the child's education and marriage.

As told to Teena Jain Kaushal

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