Case study-Personal Finance Advice
(Utilities : Electricity, Gas , Water , Telephone, Mobile, Internet, Satellite TV, NewsPaper)
(House hold: Milk, Veg/non veg/fruits, Rent, Fuel, Medical Expenses, Monthly society maintenance charges, Groceries, Maid, Laundry, Personal Care ( haircut/gym etc))
Amulya, 31 years, house maker
Ananya, 5 years
Rohit, 2 years
Monthly Income Post tax
Entertainment and Miscellaneous
Contribution to PF
Available monthly surplus
INR 40000 per year for 6 years starting 2023
INR 40000 per year for 6 years starting 2026
Owning a Home
Current value of INR 35,00,000. Want to buy in 2024.
Venkat is a 34 year old professional working in a private firm. His wife Amulya, 28 year old is a home maker. His daughter Ananya is 5 year old and started attending school. His son Rahul is 2 years old. Rahul’s family lives in a rented house. The monthly post tax income of Rohit is INR 48,284. His expenses include:
Utilities like gas, electricity, telephone which costs him INR 2,700 Per Month
Household expenses like House Rent, Groceries, vegetables, Children’s Education and Child care costs him INR 21,2000 p.m
Average Monthly cost of Entertainment and Miscellaneous expenses like gifts and buying clothes is accounted as INR 5000.
Loan on bike with EMI of INR 1850.42. The EMI’s should be paid for 6 more months.
He holds 2 ULIPs for which he pays an annual premium of INR 47,500 and receives a cover of INR 20, 00,000.
His liabilities include: Bike loan for which he pays an EMI of INR 1850.42.
His assets include fixed deposits in bank worth INR 5,00,000.
His goals are : Ananya’s Education: As per current cost, he would require INR 40,000 per year for 6 years starting 2013. Rohit Education: For which he needs INR 40,000 per year for 6years starting 2015 and buying a new home in the year 2024 which is currently worth INR 35,00,000.
Total monthly expenses are being accounted for nearly 96% of the income. This is affecting the total surplus available. But most of the expenses being incurred are in the house hold and utilities segment which are mandatory.
Only liability is the loan being on bike loan. This liability can be cleared in 6 months. This can increase the monthly surplus.
Total assets of INR 5 lakhs is in fixed deposits. This shows that Mr. Venkat should diversify his existing investments and not rely on only single asset class.
Based on the current surplus, the goal of Ananya’s Education is partially achievable and the goals of Rohit’s education and buying a home are not achievable.
Health Insurance cover is being provided for the Mr.Venkat and spouse by his company.
Considering Life Insurance Plan as an investment plan to achieve goals is not a good practice.
No Retirement Plan other than Provident Fund being deducted from Salary.
It is a good practice to maintain 3-6 months of monthly expenses as emergency fund. It is good that Mr. Venkat is holding INR 5, 00 , 000 in a fixed deposit which can act as an emergency fund. But, he is advised to hold INR 3,00,000 as an emergency fund in a fixed deposit or any such liquid funds and invest the remaining 2 lakhs towards achieving the goal of children’s education. He is advised to invest 2 lakhs in a diversified portfolio.
As per expense replacement method, the total insurance cover needed: INR 1, 23, 84,400 which includes cost of his current expenses and future goals of children education. He has been paying ULIPs for past 4 years which are covering him for INR 20, 00,000. So he is advised to discontinue further payments towards ULIPs and take a term policy which can cover all his expenses. This term policy would cost him around INR 15,168.
This can increase his surplus by annual surplus by INR 32,332. The new surplus also changes the scenario of goal achievement.
As a start Mr.Venkat can release INR 2,00,000 and invest them in a diversified portfolio towards his children’s education.
The future cost of Ananya’s education is INR 3,52,571 considering an inflation rate of 10%. But if he invests INR 1,00,000 (withdrawn from existing fixed deposit) towards this goal now, then the fund shortage will be INR 1,26,473. This goal can be achievable now based on adjusted surplus levels of surplus by investing INR 604.32 per month.
The future cost of Rohit’s education is INR 3,70,709 considering an inflation rate of 10%. But if he invest INR 1,00,000 (withdrawn from existing fixed deposit)towards this goal now, then the fund shortage will be INR 1,25,292.This goal can is now partially achievable by investing INR 513.77.
He can invest remaining INR 981.16 towards retirement.
Since the total monthly surplus is only INR 2099.25, he can either choose a SIP of Balanced fund with a ideal mix of both debt and equity exposure.
Once he pays off his loan on bike he can start investing that additional INR 1850.42 which is being paid for EMI.
He should revisit the financial plan after 1 year and make sure he changes his plan as per the changes in the financial state and get a review whether the goal of home buying is achievable or not. Reviewing and monitoring financial plan is as important as planning financials.
The analysis and recommendations of above financial plan are generated by Arthos- Free personal finance platform by ArthaYantra.