Financial Plan for a real life

May 11, 2010

Dear Sk, as I promised ur Financial plan is ready & given below.

Mr. X (SK), an Ex Indian Navy man, is currently working as an Electrical Engineer in a pvt. Shipping co. belongs to a small city in South India. Family consists of his wife Mrs. Y, & a Daughter Baby Z. On his request, a detailed analysis of his present financial condition was done. The result of analysis & corrective action recommended are given below.

The Present Condition:-

At present, Kumars are residing in a rented accommodation & they have planned to live there for at least next 7-8 years till their dream of constructing their own home is over. At present their investments in Debt (PF, PPF, FDs etc) & in Investment oriented Life Ins. Policies represents a major chunk of their investments. On assets sides there are two Residential plots out of which one ‘ll be used to construct house. To make future calculations, Income of only Mr. SK has been considered.

The inflation rate has been taken as 7%, Increase in living standard as 2% every year & Income rise is taken as 10% per annum. Life expectancy of both (Mr. & Mrs. SK) has been taken 85 years.

What are they saving for:-

At present Kumars are saving for following goals in chronological order.

  1. A house current construction cost 35L Rs. as early as in 2017.
  2. Financial provisioning for education, career & marriage expenses of Z
  3. New Vehicle in 2018 for current cost 6L Rs.
  4. Retirement after above goals r over & sufficient provisioning is there to live a comfortable retirement life.
  5. Apart from above goals, a one time dream vacation of current cost 2L Rs. possibly in 2011.

The Cash Flow :-

The current monthly income is 113000 Rs. (it includes Salary + Pension + Interest).

Out of which no mandatory deductions are there.

So the Net monthly take home income (NMI) is 113000 Rs.

The living expenses are appx. 21.5% of NMI. A very good sign & indicates that almost 78-80% of ur NMI u r saving.

Currently No Loan is there hence EMI value is zero.

Ins. Prem. (Gen. + Life) is about 30.9% of NMI.

MF SIPs/RDs mly investments are around 22% of NMI

Net Monthly Cash Surplus is appx. 25.6% of NMI, A very healthy sign.

Current Assets & Investments:- Current assets includes gold valued 5.25L Rs. in the form of jewelry of Mrs. SK, Bank/Co. FDs 8.9L Rs., NSC 10K & RD 11K form the Debt part of the portfolio. Direct Eq. (Shares) are around 20K Rs. & Eq. MF 3.5L Rs. which together form the Eq. part of portfolio. Apart from this there is Insurance fund value of appx. 23.5L Rs. out of which 20.5L Rs. in Eq. linked ULIPs & 3L Rs. in debt based traditional plan. So adding the Ins. Fund value in other investments, the changed Assets & Investments situation is like this –

Plz. Note in the above calculation, for real estate, only the investment oriented 1800 Sq. feet plot value has been considered as u r going to use the bigger plot (6400 Sq. Ft.) for self consumption & it ‘ll remain that way. .

Combined current valuation of all assets & investments is appx. 46.5L Rs.

Protection:- Currently Mr. SK is covered for 72L Rs. Out of which 16L cover is from Aviva life long, which is to be dropped finally. So the net cover as on date ‘ll be around 56L Rs. Neither Medical ins. nor accidental insurance for self or family is there.

Liabilities:- No loan is running so loan related liabilities r nil as of now. Future financial liabilities in the form of children’s Edu., Career & marriage Exp. are there. Mr. SK intends to construct a house of valuation 40L, in future from his own money (as per his own estimate in 2017).

Path to be taken:-

Here is the future journey path of their financial nirvana.

First of all please keep amount equal to 3 months’ expenses (Living, Ins. Prem., MF SIPs) appx. 80000*3 = 240000 in your bank account for immediate liquidity in case of emergency. Try to put this amount in ur saving bank account where u have SWEEPING FD facility. Apart from it keep another 3 months’ expenses amount in Liquid plus funds for emergency.

1. Protection:- On detailed checking of lifestyle, future goals & future loan liabilities, the current Lifecover (all thru investment oriented policies) is not a good thing & the same is falling short of actual need. First of all I’m discussing for current policies.

Bajaj Unit Gain – Although policy is in wife’s name but u r paying the prem. Action taken by u already as advised in mail.

Aviva Life Long – surrender this policy

HDFC traditional Endowment plan – Surrender this plan as the current surrender value is just around ur break even point

Birla Children plan – Opt for prem. Holiday. After surrendering all these policies. Ur new Sum assured from all these plans ‘ll be like this 40L from HDFC Y’star Ulip & 6.44L from Birla children Plan. Total around 46L.

Future requirement of Life insurance is as below.

1. In case of Home Loan, take a term Plan equal to loan amount in future as & when u r constructing the house thru home loan. The details on home loan r discussed in the Home topic.

2. Use HDFC Young Star ULIP’s Sum assured for expenses of child Education & career. So keep on paying prem. Year after year with out fail.

3. Total 40L Term Plan for marriage expenses of Z. 25L term cover for age 57, to be taken from IPru Pure Protect Elite. 15L term cover from Aviva – Life Shield Plus for age 52.

4. To cover living expenses of ur family adequately in ur absence, Take 50L term cover for age 60 from Aegon Religare’s I-Term. & another 50L Term cover from Kotak Preferred Term Plan. Take these plans immediately.

Please note, While selecting Term plans, importance is given to have the cheapest term cover or next to cheapest cover & over all to have a mix of covers from different Ins. Cos. You may discuss (if u feel that the idea is not at all comfortable with u) in detail.

Purchase a Family Floater mediclaim policy for ur family’s medical expenses of at least 5L cover. The prem. paid by you for this policy is eligible for Tax benefit under section 80-D for max. limit of 15000 Rs.

As & when u purchase ur house, Insure it with a House Holder (HH) policy from IFFCO Tokio General Insurance Co. with detailed covers of building for earth quake, lightening, floods & terrorists activities for current market valuation of ur property, fixtures & furniture, electrical equipments & appliances for theft & break down, Jewelry for upto 50K in house against theft & loss in traveling. With this HH policy, plz. take accidental insurance of 10L for urself & 5L for ur wife. While Taking this policy, try to take 7-8 sections to get maximum discount on prem. Plz. take this policy for an year only & renew the same for market value of ur property year after year. Plz. keep the purchase documents of ur jewelry, electrical & other equipments safely as these ‘ll be required at the time of claim if it happens. Apart from 50K valuation, keep remaining jewelry in bank lockers.

I’m advising for specific cover of 50K for jewelry as beyond this amount the Ins. Co. ‘ll ask u to provide purchase & valuation details of the jewelry, which ‘ll be quite problematic to u, as I think a major part of this is received as marriage gift by Mrs. Karthika.

2 Home:- As of now u are planning to purchase another plot as an investment, Plz. Don’t do that. The reason is ur current financial condition as well as future liabilities r not allowing u to do it. Also ur family is still living in a rented accommodation. So ur first priority should be to construct a house on ur plot. There is more logic in doing so immediately, say after 2-3 years from now onwards, something happens to u, & ur family is still living in rented house, then how ‘ll they live like that continuously in ur absence & how ‘ll ur wife, construct the house?

For construction of house, start the work immediately. Use 5-6L Rs. From ur Fds for ur own contribution & for balance amount go for a home loan of 24-25L Rs. Based on ur income level, any bank ‘ll finance u easily. My preference ‘ll be SBI & within SBI the specific product ‘ll be Max Gain home loan. For details on SBI Max. Gain home loan, u may discuss in detail after going thru the plan. Go for a 20Y loan term as of now. The appx. EMI ‘ll be around 21K Rs. As of now which is very much within the limit of ur mly cash surplus amount.

Don’t forget to insure ur house property at the time of completion of construction for its fair market value & renew the same every year.

P. S. As u r liquidating a part of ur FDs for construction of ur house, ur Interest income ‘ll come down & so do ur total mly income (Salary + Pension + Interest ). The reduction ‘ll depend upon how much money u r pulling out from ur FDs. & also what Interest rate FDs u r redeeming.

3 Child:- From ur own reply, u r planning to save 5L Rs. in today’s value for career related expenses of Z. So the obvious thing is u r planning to shoulder the responsibility of normal education of Z from ur own pocket. Keeping in view the spiraling cost of education, ur future expenses on this ‘ll increase in a big way. So I’m calculating that a education funding corpus is created which ‘ll cover all these education related expenses.

Back of the envelope calculation shows that a one time investment of around 24L Rs. growing @ 15% growth rate can easily cover education expenses from nursery class to professional education. The calculation also indicates that the current HDFC Y’star ULIP of 2L yly prem. can sufficiently do all this thing. So u need not to worry for education & career related expenses of Z.

For Z’s marriage & as a back up for edu. & Career expenses of Z in case there is a short fall from HDFC Y’g Star ULIP. Start investing 10K Rs. monthly in Eq. MFs & balanced funds. Increase this amount by 2000 Rs. Every year. U ‘ll wonder from where this amount ‘ll arrive, My dear friend, the prem. Saved from surrendered policies is the answer. The saved prem. Amount is almost 2.5L Rs. Yly. So after investing 1.2L Rs. yly for Z’s marriage & Education back up, u r still left with 1.3L Rs. spare cash yly.

Keeping in view the current gold holding u have, no separate provisioning is advised to accumulate gold for Z’s marriage. I’m open for discussion on this if u want to.

4 Vehicle:- Invest 11K Rs. (from remaining Prem. saved amount) Mly in MFs, primarily in balanced funds to save for ur dream vehicle. @ a conservative growth rate of 12%, within next 4 years i.e. around 2014, u ‘ll have enough cash in ur pocket to purchase ur dream vehicle with ur own money.

5 Retirement: For post retirement life, life expectancy is assumed up to age 85 both U & Mrs. Y. Inflation rate of 7% is taken as basis for calculating post retirement life expenses. An increase in ur life style @ 2% per annum is also considered from current level for calculation of retirement corpus.

Ur current mly expenses are around 25000 Rs. out of which 4K Rs. is the house rent, which ‘ll not be there as & when ur own house is completed. So the net living expenses r around 21000 Rs. only. After retirement, there ‘ll be reduction of appx. 35% in this figure so ur post retirement life, mly exp. ‘ll be around 13650 Rs. in current value.

The Corpus required for your retirement is appx. 3.9Crore Rs. Out of which your current investments in Fds (less withdraw for House construction), Policy surrender amount & current Shares & Mfs investments (total 12L) as well as the 1800 Sq. Ft. plot (current valuation taken as 5L Rs.) are considered as starting capital. The growth rate for these 17L Rs. from now onwards is taken @ 8.5%.

The monthly amount to be invested for creating retirement funds is 1.55L Rs. Mly if u opt to retire @ age 50 @ 15% growth rate for this new investment from now onwards year after year.

That’s the reason enough to show u that u can’t think of retiring @ age 50.

The monthly investment requirement for retirement funds is 25K Rs. Mly if u opt to retire @ age 60 @ 15% growth rate for this new investment from now onwards year after year. U r already investing almost the same amount in MFs/RDs as of now. So the question remains only to go for the correct choice of MFs.

Till your age 50 the major portion of retirement funds ‘ll be in Pure Eq. MFs. From then onwards divert ur fresh investments in balanced funds & also bring down your pure Eq. holdings to 40% till u reach age 55 in favor of balanced funds. At the time of retirement have a mix of Pure Eq. MFs, Balanced, MIPs, Fixed Income instruments. No morecomment as of now for exact % of individual instrument at the time of retirement.

5 Vacation:- As of now plz. Skip ur vacation plan for at least the construction of ur house is over within next 18-24 months. We ‘ll revisit in between to provide funding within ur overall cash flow to go for a vacation.


List of MFs‘ll be provided after getting your review on above financial plan.

All the above analysis, planning & advises there on, are based on ur current salary structure.

Please feel free to ask whatever doubts, questions you have.

I wish for best of your future life. Happy Investing.

Please take good care of yourself & your family.


Ashal Jauhari.