Good financial planning can help to manage the income efficiently. Not only it ensures security and peace of mind for an individual, but it also allows him to live a stress-free life.
Naresh Desai, aged 28, is a software engineer with a reputed company. He has plans to marry next year. His immediate family consists of his father, aged 71, and mother, aged 68. Naresh is not unfamiliar to financial crisis, besides his parents have inculcated the habit of savings since childhood.
Since Naresh has very limited knowledge of modern financial instruments, he prefers to invest in traditional saving instruments like bank fixed deposits and insurance. His needs are growing. He has already booked a flat availing a home loan of Rs 20 lakh.
The present net take home salary of Naresh is Rs 95,000 per month. The break-up of his expenses are as follows:
Thus, out of Rs 95,000 he receives, Rs 63,000 is spent towards monthly expenses, home loan EMI and insurance premium.
Naresh Desai’s investing goals are as follows:
* inflation is considered at 6%, returns are considered at 12%
The present assets of Naresh Desai include:
- Fixed deposits Rs 10,00,000
- EPF Rs 6,00,000
- Insurance value Rs 4,70,000
- Property Rs 23,00,000
Naresh Desai’s fixed deposits are enough to cover an emergency. Thus, he already has built a good emergency fund. Naresh is covered through employer group insurance policy of Rs 5 lakh. He has bought a separate health policy for his parents’ worth Rs 2.50 lakh each. He has bought a separate top-up of Rs 10 lakh. Besides this, he is paying semi-yearly insurance premium of Rs 16,500 which provides a term plan cover of Rs 1 crore. He also has two endowment policies. Thus, he is adequately covered. He should stop endowment policy which matures in two years. The yield on endowment policy is much lower and it makes sense to invest the amount in equity and debt funds which can provide higher returns. He can also consider surrendering his endowment policies and increase term cover post his marriage.
The only debt Naresh has is in the form of a home loan. He has opted for EMI payments instead of opting for pre-EMI interest even though the property is under construction. This is a good decision because he can claim tax benefits on interest as well as the principal amount.
Naresh has also taken care of the taxation aspect. His EPF contribution and life insurance premium exceeds the Section 80C limit. He can also avail of interest benefit for his under-construction house in 5 equal installments after completion of construction.
Let us analyze Naresh’s financial goals:
Marriage: Naresh would require Rs 3.21 lakh for his marriage. He can meet these expenses by withdrawing a part of his fixed deposit.
Buying a car: He needs to invest Rs 2149 every month to fulfill his goal of purchasing a car. Since the goal is short-term, he can consider investing in ultra-short debt funds.
Child’s education: This is the long-term goal. Naresh needs Rs 92 lakh approx. to cover his child’s future education expenses. Since the goal is long-term, he can take some risk. He should consider investing in large-cap equity funds through Systematic Investment Plan (SIP). He needs to save Rs 5,108 every month to meet this goal. He has surplus funds to invest. Equity funds are known to deliver a 12% annual return. This is just a conservative estimate. The actual returns could be higher in the range of 14%-16%.
Retirement fund: Naresh’s present annual expenses are approximately Rs 5 lakh. This excludes home loan and children’s education. Naresh is already contributing to EPF. His basic salary will rise by 7% every year. If he maintains regular contribution there can be a sizable surplus during retirement. He also needs to invest in equity funds. A modest investment of Rs 2,575 every month through SIP can ensure he receives Rs 53 lakh after 35 years. He has the advantage of starting early. Most people plan for retirement when they have hardly a few years of professional career left. Late planning can add a huge burden because of the paucity of time. Also, the investment required will be quite huge. Given his young age, Naresh can secure his retirement by investing just Rs 2,575 every month.
Good financial planning can help to manage the income efficiently. Not only it ensures security and peace of mind for an individual, but it also allows him to live a stress-free life. It can also help to tide over difficult times with ease. As illustrated in the above example, it is possible to build good assets with smart investing. In uncertain times, it pays to be financially vigilant and avoid regrets later on.
(By Abhinav Angirish, Founder, Investonline.in)