Financial planning for an young individual earning ₹5 lakh per year
4 min read 24 Dec 2021, 04:22 PM ISTFinancial planning: Please review your goals and investments periodically and re-align if needed to achieve various financial goals, including retirement planning and insurance
Premium
Financial planning involves setting various financial goals in your life. In this article I will discuss how a young unmarried person of 25 years should plan for his financial planning. For understanding purpose I have presumed his monthly take home salary to be Rs. 40,000 per month or ₹ 5 lakhs annually.
Buy accident insurance
At the young age the probability of death by illness is lower than it being caused due to an accident. One should buy a personal accident policy, which is a low cost insurance solution for those who cannot afford life insurance premium at the initial stage of their career. You should buy accident insurance equal to minimum 12 times of your annual income i.e. for 60 lakhs which will cost you around Rs. 9,000/- per year. It covers death as well as physical disability caused due to any accident.
Buy Health Insurance
With increasing costs of medical treatment, it is very important to have adequate health insurance. Buy health insurance even if your present employer provides one as it may happen that when you switch your job the new employer may not provide it. If you buy the health insurance then, it may not cover any pre existing diseases for next three to four years. The amount of health insurance you need depends on which city you live in and your social status. Medical treatment in metro cities is costlier than in smaller places so the amount of health insurance cover you need to buy will depend vary. If the employer covers your parents as well in office policy, earmark that policy for your parents as it covers pre existing disease from day one. You need to buy a health insurance policy of minimum of Rs. 5 lakhs which will cost you around Rs. 7500/- annually. Buy a separate policy for your parents also of adequate amount.
Buy Life Insurance
In case your parents are dependent on your income, you need to buy a life insurance for a minimum amount equal to 15 times of your annual income i.e. Rs. 75 lakhs. As a thumb rule one should buy life insurance equal to 10 to 12 times of annual income. However, as your income will increase in the future, the insurance premiums also goes up with advancing age, So it is prudent to lock the premium for rest of the tenure by taking higher cover. You should buy life insurance for tenure upto your retirement age i.e. cover for 35 years.
You also need to buy life insurance to cover any home loan liability so as to ensure that your legal heirs inherit the house and not the home loan. For all life insurance needs, one should always buy a term insurance only. Since you are technology savvy you should buy online term plan which is cheaper than regular term plans. Please review your insurance needs after your marriage, birth of children and increase in your income periodically.
Create Contingency Fund
You should have a contingency fund equal to take care of expenses in case you lose your job for at least minimum six months. Since the contingency fund is supposed to be easily accessible and the returns should not be volatile, you should invest this contingency fund in liquid fund scheme or fixed deposit with bank. Moreover, I would advise you to get a credit card which gives you some financial flexibility. Credit card is a double edged sword and should be used very sparingly. Careless use of credit card can lend you in debt trap. It should only be used in case of emergency and not for paying your day today expenses. The credit card can come as a supplement to the contingency fund.
Planning for down payment for purchase of house
Since you can get a home loan upto 90% of the value of the house if the loan amount does not exceed Rs. 30 lakhs, you can buy a house costing around 30-33 lakhs with a margin money of 3 lakhs. I have presumed that you will buy a house after five years. Since time horizon for accumulating the margin money is 5 years, you should invest in aggressive hybrid fund through Systematic Investment Plan (SIP). For accumulating Rs. 3 lakhs in next five years you need to invest Rs. 3,650/- every month assuming a conservative average annual return of 12%.
Planning for Marriage Expenses
It is assumed that you will need to accumulate Rs. 10 lakhs after 7 years for your marriage. As the period available is reasonably long, you should invest in Nifty or Sensex Index fund. For accumulating Rs. 10 lakhs in 7 years you need to invest Rs. 7,650/- through SIP assuming average annual return of 12% p.a..
Retirement Planning
Since presently you are not married and therefore cannot have any goals of child education and marriage at present. But whether you are married or not or whether you have children or not, like taxes, retirement is also almost certainty therefore you have to treat retirement planning as vital goal. Rationally and logically you should start saving for your retirement from your first salary. With the surplus of Rs. 6,850/- left every month out of your salary an amount of Rs. 10 crores can be accumulated in 35 years by investing in midcap funds. These funds though volatile in short term can give you a return of 15% (Net of tax) for such long tenure. You can invest in Equity Linked Saving Scheme popularly known as ELSS if you have any tax liability and earmark the same for your retirement goal. I have not considered the retirement benefits receivable at superannuation in this computation.
Please review your goals and investments periodically and re-align if needed to achieve various financial goals.
Balwant Jain is a tax and investment expert and can be reached on jainbalwant@gmail and @jainbalwant on Twitter.
"Exciting news! Mint is now on WhatsApp Channels 🚀 Subscribe today by clicking the link and stay updated with the latest financial insights!" Click here!
