My monthly salary is Rs 1.5 lakh. I bought a plot with EMI of Rs 48,000 and have a personal loan EMI of Rs 12,500. How do I plan my finances?

I am a private sector employee with a net monthly income of 1.5 lakh. Currently, I have an ongoing plot loan at a 10 per cent interest rate with an EMI of Rs 48,000, and there are 84 EMIs remaining. In addition to this, I have the following financial commitments: 

Personal loan EMI: Rs 12,500 

Wholelife Life Insurance Plan: Rs 17,000 per annum. 

Term Insurance with coverage of 1 crore: Rs 18,000 per annum 

Group Health insurance: Rs. 17,500 per annum 

Rent for the apartment I live in: Rs 17,000 per month 

Monthly household expenses: Rs 35,000 

I am married and the sole bread earner. My son is 11 years old and is studying in the sixth standard. His school fees amount to approximately Rs 2 lakh per annum. I have dependent parents. They have adopted me, so the company group insurance does not cover them. I am looking for a suitable medical insurance plan for my 75-year-old father and 65-year-old mother, who have no income. I am seeking guidance on how to effectively manage my finances. 

Reply by: Balwant Jain, Mumbai-based tax and investment expert 

The answer is based on the limited information you have provided. 

First, let us look at your life insurance. One should have life insurance at least equal to 12-15 times of net annual income so as to ensure that the dependents are financially adequately provided for in case untimely death of the bread earner and enjoy the same lifestyle. Younger persons should buy life insurance on a higher multiple side..

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For buying life insurance coverage pure term plan is the only product which one should buy. You should never mix insurance and investment and buy separate products- term plans for life insurance and Systematic Investment Plans (SIP) in mutual funds for investment. You can consider surrendering the whole life endowment plan. 

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Since I am suggesting you surrender of your whole life policy, you will be covered only 5.5 times your annual income under the existing term plan of Rs 1 crore, which is only 5.5 times your annual income. So, I suggest you buy additional life insurance of at least Rs 2 crore. 

For your parents you can buy health plan with a monthly premium of around Rs 5,900, which will provide cover of Rs 1 crore. 

As per the following cash flow statement, your monthly surplus is only around Rs 9,000. 

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Since you have not indicated any investment details, I presume that you do not have any financial savings. Looking at the monthly commitment of around Rs 1.40 lakh every month, you need to first create an emergency fund equal to a minimum of six months of expenses and commitments which comes to around Rs 8.40 lakh. The monthly surplus can be used to create the emergency fund by investing in the liquid fund through SIP. 

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There are no savings visible for you to plan for your other goals till your plot loan is fully repaid. Once the plot loan gets fully repaid, you can start investing the monthly surplus in various categories of equity-oriented schemes of mutual funds. As far as you buying a plot and taking a loan is concerned, it was a mistake on your part as the returns generated by such investments are even lower than the interest which one pays for such loans. Moreover, the interest is not tax deductible. 

Additionally, one should not resort to a personal loan unless it is for dire urgency and emergencies like sudden hospitalisation etc. 

Once your finances improve, please buy a stand-alone health insurance policy even if your employer provides you with one as the same may not be available in case of a job change or your employer decides to discontinue it. The new policy even if bought will not cover pre-existing diseases. 

(Views expressed by the investment expert are his/her own. E-mail us your investment queries at askmoneytoday@intoday.com. We will get your queries answered by our panel of experts.)  

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