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Family Finances 101: Khobragades High Income, Early Start Put Goals Within Reach

Family Finances 101: Khobragades High Income, Early Start Put Goals Within Reach

family financesYoungsters are usually perceived to be risk takers, willing and excited to experiment and explore in areas that the older generations typically shy away from. The old adage, the bigger the risk the bigger the reward, doesn’t seem to fit for the Khobragades. When it comes to finances, one would expect them to invest enthusiastically in equity to help achieve their long-term goals. However, the Khobragades, despite their age, don’t quite fit this risk profile.

For, though it’s understandable to avoid equity in the current market uncertainty, the Khobragades have taken their scepticism to an extreme and completely abstained from investing in this asset class. Instead, they hold 89% of their portfolio as cash, while the remaining 11% is invested in debt. “I know that I need to invest in other investment options, but I have been confused of late.

Given the current market scenario, I have stayed away from equities, though now I have sought the help of a financial planner for my investments,” says Akash, a 30-year-old doctor. Despite the skewed portfolio, the Khobragades have little to worry. Since they are young, they have ample time to rectify it.

Besides, their goals are realistic, which makes it easy to prepare a financial plan for them. Akash lives in Mumbai with his 24-yearold wife, Snehal, who is also a doctor at a local hospital. The couple take home a monthly salary of Rs 60,000 and Rs 37,500, respectively.

Apart from this, Akash does medical research for pharmaceutical companies, which helps him earn another Rs 60,000 every month. As for their financial outgo, the couple pays Rs 10,080 as house rent and doles out Rs 3,483 on transport expenses every month. They spend Rs 35,716 on other household expenses, while Rs 9,586 is incurred as insurance premium.

The couple also bought a Rs 22 lakh house in Mumbai, in 2011, for which they took a home loan and are paying an EMI of Rs 17,869. This leaves the duo with a very high surplus of Rs 80,766, which needs to be invested carefully to achieve all the goals. These include building funds for a vacation next year, repayment of home loan, down payment for a new house as an investment, and their retirement.

Since they don’t plan to have kids anytime soon, they have not included the relevant expenses in their goals as of now. However, before Sumeet Vaid of Ffreedom Financial Planners lays out a financial roadmap for the Khobragades, their insurance needs and emergency preparedness need to be reviewed. Akash currently has a term insurance plan of Rs1 crore.

According to Vaid, he is adequately insured and, hence, does not need to buy more life policies. He has a traditional endowment plan, LIC Jeevan Tarang, and a Ulip, both of which have been allocated to his retirement goal. However, Snehal does not have any life insurance. Hence, Vaid suggests that she buy a cover of Rs 50 lakh for a term of 36 years, and this will cost her a nominal sum of nearly Rs 400 every month. On the health insurance front, the Khobragades have done an excellent job.

They both have individual medical policies of Rs 5 lakh, as well as a personal accident cover of Rs 15 lakh for Akash. Despite having done well with insurance purchases, the Khobragades have not set aside a sum for exigencies. Considering their spending, they need to have an emergency corpus of about Rs 2 lakh, which is equal to three months’ expenses. Currently, they have about Rs 1.5 lakh in their savings account, which can be allocated to this requirement. Besides, another Rs 20,000 has been invested in ultra-short term debt funds.

To meet the shortfall of Rs 30,000, the couple must invest Rs4,500 for six months in a short-term debt fund. Among the other goals, the couple wants to repay the outstanding home loan of Rs 11.4 lakh by the middle of 2016.

Since Akash’s parents will contribute about Rs 6 lakh for this goal, he only has to arrange for the balance Rs 5.4 lakh. For this, they should invest Rs 19,000 per month in a short-term debt fund, and the proceeds will help them repay the loan. Another goal is a trip to Ladakh next year, for which they need Rs 65,000.

For this, the couple must invest Rs 5,000 every month in a recurring deposit. Assuming a growth rate of 8.5%, the investment is likely to generate the required sum in 12 months.

To build a corpus of Rs 10.7 crore for their retirement in 30 years, Akash can allocate his two insurance policies—LIC Jeevan Tarang and Bajaj Allianz Ulip—which are expected to contribute about 10% to the goal.

LIC Jeevan is expected to fetch Rs 1.9 lakh at the time of maturity in 2018, and this amount must be invested in equity mutual funds. Assuming a 12% growth rate, the amount is likely to grow to Rs 29 lakh. Similarly, the Ulip is likely to yield Rs 6 lakh in 2020, which must also be invested in equity funds. At the end of 23 years, this is likely to grow to Rs 72 lakh.

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