Wednesday, 4 January 2017

How Can Financial Planning Help You?

Have you put your financial planning on the back burner because you don’t know how to proceed with it? Well, you can take a cue from the following couples who may belong to different sections of the society and income group, but they all are juggling with their finances. Let’s help them out:

1st Couple: Dhananjay Kumar and Kalpana

Existing Financial Status

DhananjayKumar, 32 years old, works for a private company in Gurgaon. He stays with his wife, Kalpana, 29, who works for a digital marketing company. WhileDhananjay earns Rs 75,000 a month, Kalpana brings in Rs 50,000, making the total to Rs 1.25 lakhs/month. Both Kalpana and Dhananjayhave a variable component in their salary package—Rs 10,000— which they get half-yearly. Of this amount, Rs40,000 is spent on household expenses, Rs 20,000 on house rent and Rs 5,000 on credit card expenses. Both Dhananjay and Kalpana invest Rs 10,000 and Rs 5,000 respectively in RDs (recurring deposit) of six months. The couple is left with a surplus of Rs 45,000/month. The couple is planning a child in next two years. As they are currently living in rented accommodation, they want to move into their house in next five years.

Kumar’s goals include building an emergency corpus, buying a house, saving for the child’s education and wedding in the distant future, purchasing a car and retirement.

Insurance Portfolio

Till now, they don’t have any health insurance and term insurance policies. As both are working, they are covered under their corporate health insurance policy. Also, Kalpana’s company is covering her under a group personal accident insurance policy.

However, the couple needs to take steps to fortify their insurance portfolio. As there is some time before they start their family planning, they should buy a comprehensive health insurance plan with maternity benefits. They can go for a family floater health insurance option, offering the coverage of at leastRs 5 lakhs. While they are covered under corporate health insurance, it is necessary to go for a separate health insurance policy that will help them in case they change their job, or their employers decide to trim the coverage.

Further, as they both are financially dependent on each other, they should buy term insurance plans to ensure that the demise of one partner doesn’t affect the other spouse financially. A term insurance cover should ideally beminimum ten times of their annual income. If we talk about Dhananjay’s income, he should buy a term insurance policy offering the coverage of at leastRs90 lakhs-Rs1 crore. Similarly, Kalpana should have a term insurance policy offering the minimum coverage ofRs 60 lakhs.

As the incidences of critical ailments, like cancer, heart attack, etc.; have increased among youth also, the couple should go for a critical disease insurance. Acute ailments also mean the loss of income, disability or change in lifestyle. While, a mediclaim policy covers hospitalisation expenses, a critical illness insurance pays a lumpsum on diagnosis of a critical ailment. The amount you get can be used for various purposes like paying for costly treatments, making up for loss of income, etc. Going by the income, Dhananjay should go for the minimum critical illness coverage of Rs 10 lakhs for which he may only need to pay Rs 3500 yearly. Similarly, Kalpana’s critical illness cover should offer the minimum coverage of Rs 5 lakhs. For which, she only needs to pay Rs 1500/yearly.

Besides, it is important to include personal accident insurance policy also in your portfolio. A term insurance policy makes payment only when the policyholder dies, but what if he/she doesn’t die? Here your personal accident insurance comes to your rescue. This policy is specifically designed to safeguard you against any damage caused due to an accident, including disability.

While, Dhananjay can go for Rs 25 lakhs personal accident coverage, Kalpana should have the minimum coverage of Rs 5 lakhs. For 25 lakhs and Rs 5 lakhs coverage, the premium can be around Rs 4,506 and Rs 1,482 annually, respectively. They should go for long-term policies which offer the coverage for three years in one go. In this way, they don’t need to renew their policy every year and they can save some premium amount also.

For the payment of insurance premium, the couple can use their variable salary portion which they get half-yearly.

Roadmap to the future

To take care of eventualities, the couple should build a contingency corpus equivalent to six months of their expenses. It will amount to Rs 4,80,000. To generate this corpus, the couple should start allocating their cash holding of Rs 45,000in an ultra and short-term debt fund for higher returns. The couple can start investing for other goals only after the emergency corpus has been built.

As for the other future goals, they want to buy a house worth Rs 50 lakhs in a year’s time. For the down payment of Rs15 lakhs, Dhananjay’s family has agreed to support them and for the remaining Rs 35 lakhs, they can take a loan for Rs 25 years, which will result in an EMI of Rs 30,579/month at 9.5% interest. A major part of this amount can be sourced from the rent the couple will save after shifting to their new house.

Next, the couple wants to save a sum of Rs 6 lakhs for their new car which they want to buy in the next two years, and they don’t want to take any loan for financing their vehicle. For this, they should start investing in some short-term debt funds. Also, their RD investment can be used to fund their car.

For their future kid’s higher education and marriage in 19 years and 25 years, respectively, the couple will require Rs 80 lakhs and Rs 1 crore respectively. To meet the first goal, the couple should start investingRs 10,000/month (assuming the rate of return as 12%) in an equity fund and they will get Rs 87.53 lakhs after 19 years, for the second goal, they should start investing Rs 15,000/month (assuming the rate of return as 12%) and they will get Rs2.85 crore after 25 years.

Finally, for the retirement, they want Rs10 crore in their kitty. To achieve that number, they should invest both in equity and debt. If Dhananjay invests Rs8,250/monthly in a retirement ULIP plan, he can get Rs74.20 lakhs at the age of 60. Similarly, if Kalpana starts investing Rs7,500/monthly, she can get Rs86.61 lakhs, if we assume the rate of return as 8%.

Also, as both Dhananjay and Kalpana are salaried, they are making contributing towards EPF also. If we assume, Dhananjay’s EPF contribution is 12% of salary, average annual increase in income is 5%; current interest rate is 8%, and current EPF balance is Rs86,400, he will get Rs5.30 crores by the time he retires. Similarly, Kalpana will get Rs4.92 crores at the age of 60, if the above parameters remain same. The total amount they will get is Rs11.82 crore (74.20 lakhs+86.61 lakhs+ 5.30 crores+ 4.92 crores).They can increase their investment in proportion to the rise in income.

2nd Couple: Rajan and MuktiBharadwaj

Existing Financial Status

RajanBharadwaj, 40, stays with his wife, Mukti, 39, and two daughters, aged 9 years and 18 years in Gurgaon. As the family stays in their house, they save money on rent. While he is a pilot in Air India and draws a salary of Rs 3 lakhs a month, his wife is a housewife. When it comes to their outgo, Rs 75,000 is spent on household expenses, Rs 20,000 and Rs 60,000 goes towards car loan and home loan respectively. Besides this, credit card expenses are Rs 25,000/month and Rs 40,000 goes towards children expenses. He also paysRs 25,000 as insurance premiums.

Insurance Portfolio

Rajan has a term insurance plan of Rs 1 crore and a family health insurance plan of Rs 10 lakhs. Given the income of Rajan, he should buy an additional term insurance cover of Rs3 crore. Similarly, if we talk about the healthcare coverage, he should expand the coverage with an extra cover of Rs 10 lakhs.

He can buy a super top-up policy to supplement the family’s health cover. It will help in expanding the health coverage at nominal premium rates. As Rajan belongs to a high-risk job category, he should go for personal accident insurance policy also.This will ensure the financial stability of his family in case of accident or disability.

Roadmap to the future

Now, Rajan can start planning for his future goals; the first one is building an emergency corpus equal to six months of his expenses. It will amount to Rs 14.70 lakhs. To build this, Rajan can allocate his cash holding of Rs 55,000 in a short-term debt fund for six months for easy access and higher returns.

To begin with, for the wedding of his elder daughter, Rajan has estimated a need of Rs 41 lakh, and to meet this goal, he will have to start an SIP of Rs 25,000 in an equity mutual fund. Similarly, for his younger daughter, he wants to amass Rs 50 lakhs and for that he will have to start an SIP of Rs 20,000 in an equity mutual fund.

Finally, for retirement, he should at least invest Rs 2,000 in the PPF. Additionally, he will have to start an SIP of 8,000 at 12% rate of return in a diversified equity fund for the specified period.

3rd Couple: Vikram and Ramya

Vikram is 35-years old and stays in Delhi with his wife Ramya, 32-years old,and one child, aged three. WhileVikram earns Rs 58,000 a month, Ramya brings in Rs 66,000/month, bringing the total to Rs 1,24,000. Of this amount, Rs 10,000 is spent on household expenses, Rs 13,500 on home loan EMI,Rs 9000 on a child’s expenses and Rs 15,000 on miscellaneous expenses. The family stays along with Ramya’s parents, who are dependent on the couple.

The couple’s goal includes building an emergency corpus, buying another house in next five years and saving for the child’s education.

Insurance Portfolio

The couple doesn’t have term insurance plans. As both are working and are financially dependent on each other, buying term plans should be their priority. While Vikram will have to pay Rs 19,631 yearly to get Rs 1 crore coverage (he is a smoker), Ramya has to pay Rs 8,945 yearly to get Rs 1 crore coverage (she is a non-smoker).

As for health insurance, both Ramya and Vikram are covered under their corporate health insurance policies, but it is necessary that they buy separate health insurance policies, which covers their child also. As Ramya’s parents are senior citizens, they should buy separate health insurance policies for them. With the rising age, the incidences of ailments also increase. Therefore, it is best to cover senior citizens under a separate health plan. If the high premium rate is bothering the couple, they should go for super top-up plans, which provide health coverage at an affordable rate. These plans come into effect once you cross the deductible limit.

Roadmap to the future

The couple should build a contingency fund of Rs 2,85,000, which is equal to their six-month expenses. They can deploy their surplus cash of Rs76,500 to build this corpus.After that, they can work towards their other goals, which include buying a new house in next five years. The current market value of their house is Rs 45 lakhs which can be sold to finance the down payment of a new house worth Rs 80 lakhs. For the remaining Rs 35 lakhs, they should start investing in mutual funds via SIP. An SIP investment of Rs 20,000/month at the rate of 12% can yield good returns. For the kid’s education, if each of them investsRs 10,000/monthly in a mutual fund,they can get Rs 1 crore (approximately) after 15 years at 12% annual returns.

Handy Guide for People:
Tips for investing

  • If time is at your side, invest aggressively in equities. As you reach near to your goals, divert a portion of your funds from equity to debt to prevent it from market volatility
  • Don’t mix insurance with investment and tax
  • Monitor your investments regularly
  • Be aware and stay alert
  • Make sure you know the latest tax rules
  • Be wary while conducting e-commerce transactions
Here are some insurance and investment rules which you should consider if you want to meet your financial goals.

Buy health insurance carefully

Though it is imperative to buy a health insurance cover; it is necessary to understand which policy you should opt for. So, take help of the below tips and choose your health policy accordingly. 

Did You Know?

The Final Verdict

Financial planning is not a rocket science as anyone can do it prudently if he/she has clearly laid down the future goals. In a few days, we will step into 2017, so make sure that financial planning is on the top of your to-do list. How’s the idea of making it a new year resolution? 

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