Walking down a street in Jaipur’s new city area, Monika and Neeraj Narang, both 27 years old and originally from Sri Ganganagar, Gujarat, are symbolic of a new team getting its act together. Married for a year, Neeraj is an executive (corporate banking operations) with Axis Bank while Monika teaches at J.G. Public Senior Secondary School.
Neeraj’s experiences prior to his marriage have a significant influence on the couple’s dreams and goals. His father died when he was young. The uncertainty that brought into his life is the reason he gives maximum priority to having a proper education plan for his children, whenever they decide to start a family.
He has a good grounding in finance since he is in the profession, but “Monika is the chief finance officer of the house”, he says. The couple lives in a rented house now. Buying a house within the next six years is another priority for them. They want to take a few vacations abroad and Neeraj plans to take his mother along, at least on some of these trips.
However, at the moment, they are working off a car and personal loan. Neeraj keeps track of his investments as well as the markets. “My risk appetite is high and I can track my investments,” he says. Echoing millions of other dual-income young couples, he says, “All I need is a long-term strategy that is connected to the time frames I have for my goals.”
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The lower cost of living in Jaipur works in their favour: They are in control of their daily expenses. The financial tight corners they both manoeuvred through at the beginning of their respective careers four years ago have left a lasting impression. They want a solid retirement plan that will ensure that they and the family they plan to start soon will not have to cut corners in the years to come.
THE RIGHT STRATEGY
— Gaurav Mashruwala
The Narangs’ most important goal is to buy a house worth Rs25 lakh after five years. They also want to save Rs5 lakh for their children’s education in 18 years and another Rs5 lakh for their marriage. As part of retirement planning, they want a post-retirement monthly inflow of Rs15,000 after 33 years. The goals are at today’s rate of inflation.
Cash flow: The couple’s total monthly inflow is Rs35,000. Their monthly outflow is Rs26,550, including household expenses, rent, entertainment, savings and two EMIs (equated monthly instalment) towards a car and a personal loan. The EMI payouts are 20% of their income.
Net worth: The total value of their assets is Rs4.89 lakh. This includes assets for self-consumption worth Rs3.2 lakh. Thus, assets from their savings and investments are worth Rs1.69 lakh. They have liabilities worth Rs3.16 lakh, which constitute 64% of their total assets. If we remove the value of their personal assets from their total assets, their liabilities are 186% of assets.
Contingency fund: Against mandatory monthly expenses of Rs18,100, the balance in their savings bank and fixed deposit accounts is Rs65,000.
Health and life cover: Both are covered by a health plan from Neeraj’s employer. Neeraj has life cover worth Rs14 lakh through a term and endowment policies.
Borrowings: The outstanding amount on their car loan is Rs1.67 lakh and on their personal loan, Rs1.49 lakh.
Savings and investments: The balance in their savings account is Rs15,000 and they have Rs50,000 in a bank FD. The accumulation in Employees’ and Public Provident Funds amounts to Rs72,000. The surrender value of their life policy is Rs32,000. All assets are in debt-based instruments.
Tax: Currently, section 80C deductions are not fully used.
The couple spends 75% of their income. Their liabilities are very high. If we consider only invested assets to benchmark liabilities, they have negative net worth, a dangerous situation.
Families mostly do not realize their debt burden as long as they are able to service loans comfortably. But in the event of job loss, a paycut, a major illness or any other such event, it will be a struggle. The couple has health cover. Their life cover needs enhancement and their equity exposure is nil.
Contingency fund: The Rs65,000 in their savings bank and FD accounts covers expenses for three-and-a-half months, sufficient for contingencies.
Health and life insurance: There is no need for additional cover, but if Neeraj decides to leave his job, he should take another look at health insurance. He should increase his life cover to Rs50 lakh in the next year. Once their financial situation stabilizes, this should be enhanced to Rs1 crore. All these should be in the form of term plans.
Borrowings: The car loan is a depreciating asset. The other loan is for their personal use and not for creating assets. The couple’s sole aim should be paying off all loans in the next two-to-three years, even if it means curtailing some expenses.
Home buying: Purchasing a house in the next five years looks difficult. If the next two to three years are spent paying off existing loans, the remaining years may not be enough to create a large enough corpus for a down payment.
While a loan will certainly be required to buy a house, at least 25% of the down payment should come from their side.
To buy a house, after paying off all debts, start a systematic investment plan (SIP) in a mutual fund that has a 20:80 equity-debt ratio. At the time of buying the house, liquidate the SIP and borrow the shortfall amount. If possible, go for a 10-year loan only.
Children’s education: Once the home purchase is settled, start monthly investments in a large- or mid-cap-based exchange-traded funds. Or, for disciplined investing, start an SIP in an index fund to create a corpus for higher education.
Retirement: Contributions in the same SIP can create a retirement corpus too. Also, by then their salaries would have increased and the home loan would probably have been paid back. If there is any surplus left, an international equity fund can be considered.
Children’s marriage: This goal appears before retirement. So, after around 15 years, the couple should revisit the goal. If their retirement corpus seems sufficient, they should reduce retirement investments and start creating a corpus for their children’s marriage.
Tax: Payment of life insurance premium for additional policies will entail benefits under section 80C. Also, after paying off current loans, when the couple starts investing, they should allocate a small portion of equity funds to equity-linked saving schemes.
Gaurav Mashruwala is a certified financial planner.
The views expressed on this page are not the newspaper’s opinion and are provided for information purposes only by Outlook Money. Readers are requested to do their own research. Neither Mint nor Outlook Money will be responsible for any actions and outcomes based on information provided here.
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