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Tuesday, January 12, 2010

Family Budget-recommendation by Prerana Salaska

Basic Financial Planning

Since Mr Suman is the only earning member with two dependents, including a one-yearold infant, we feel that he needs to scale up his cover so that he is capable of meeting at least 15 years expenses. That means a sum assured of at least Rs 25 lakh more. This could cost Rs 6,500 p.a. He would also need to be covered for health insurance, which would entail a yearly premium of Rs 6,000.
His savings bank balance and time deposit should serve as a cushion for any emergency needs, should they arise. His current investments are skewed towards debt investments returning fixed returns. His current asset allocation is almost 80% in debt, which needs to be changed to 70% equity for his age, goals and long-term planning. He could look at directing his investment in ELSS and bank deposits maturing in the coming months towards equities to better returns.

Goal-Oriented Planning

Since for the purchase of the car, down payments and instalments will be wholly-financed by salary arrears and future incremental income, the impact on current financial flows could be considered irrelevant till the time of completion of EMI payments. However, one needs to consider that a car entails additional expenditure such as fuel costs, maintenance, servicing costs and insurance, which could amount to around 30-50 % of EMI costs. Keeping his various goals in mind, he could consider looking at a cheaper car range, which could take care of the ancillary expenses. Alternatively, he could defer purchasing the car till a further improvement in income, if he thinks buying a house is more important.

Purchasing a House

A house worth Rs 35 lakh will involve a down payment of nearly Rs 7 lakh and an EMI of Rs 20,000, for a 20-year tenure. Assuming that he opts to not buy the car and considering the current surpluses, he would still be short of EMI payments by approximately Rs 5,000, three years hence. We suggest that this decision could be deferred for another five years or until there is a marked improvement in salary. We have assumed that he presently stays with his parents and there will be no saving on rent by buying his own house.

Child Education Planning

Assuming that he would need a corpus of Rs 25 lakh for his kid in his 18th year, he should create an inflation-adjusted corpus of Rs 67.31 lakh in 17 years. Various investments in MFs would materialise to Rs 11.55 lakh, 17 years hence or in the childs 18th year. Considering his current cash flows, he could take an education loan then.

Retirement Planning

Maintaining his current lifestyle means Rs 2.40 lakh p.a, which translates into Rs 13 lakh p.a in his 60th year, after 29 years. Assuming a life span of 90 years, he needs to plan for the next 30 years at 13 lakh p.a (Rs 1,08,000 p.m), adjusting for inflation. This means a retirement corpus of close to Rs 2.26 crore when he is 60. His current investments would yield a corpus of around Rs 1.79 crore, which means that currently there is a deficit of Rs 48 lakh. Surplus after the recommended Rs 3,500 SIP in ELSS, is around Rs 3,500 p.m. Out of this, Rs 3,000 can be invested in balanced fund SIPs to yield Rs 48 lakh in 29 years at 8% p.a return.

Rationalising between goals

His current shortfall in retirement corpus needs to be revisited yearly and the plan tweaked accordingly. If he feels that buying a house or providing for his childs education constitute more pressing issues than planning for a comfortable retirement, he could utilise a portion of retirement allocation towards these needs, as required. Shortfall in retirement corpus, if any, could be met through means such as reverse mortgage in future.

By Prerana Salaskar-Apte , a certified financial planner, is a partner with The Tipping Point
source: Economic times dated 12th Jan.'10
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