Reena Joseph (32) can be an inspiration to many young women. She’s strong willed, has a clear vision and is brilliant at balancing work and personal life. Born in a middle class family, her father worked for the hotel industry.
They had money for basic needs but not for luxuries. Her parents were meticulous at money management. Her mother would set aside money in traditional savings instruments like FDs/gold/postal saving schemes, etc. Those savings helped in bringing up Reena and her brother.
A graduate who works at a bank’s call centre, Reena has picked up a few of her mother’s traits. She also has a recurring deposit. From her savings, she funded her own marriage, contributed towards the purchase of a home by her maternal family and partially shoulders household expenses. While she is particular about her spending habit, when it comes to son Riyaan (4), she loses control — that’s her way of splurging.
Reena wants to purchase a house for Rs 80 lakh in four years. She intends to save Rs 20 lakh for Riyaan’s higher education after 15 years, and another Rs 5 lakh for his marriage. She is eyeing a two-wheeler costing Rs 60,000. Reena also wants to keep aside Rs 5,000 every month to support her parents — though it is more of a wish than an actual need. All these goals will be revised on a regular basis.
Where are they today?
Cash flow: Gross annual inflow from all sources is Rs 4.18 lakh. Over and above this, there could be additional income by way of incentives in some months. Outflow against this is Rs 2.97 lakh. This includes contributions at home, insurance premium, EMI for loan against gold and mandatory savings.
Networth: Total assets are worth Rs 6.04 lakh. These include assets for self-consumption in the form of jewellery. Against this, outstanding liability is Rs 1.75 lakh. Liability constitutes about 29% of the assets.
Contingency fund: Against the mandatory monthly expenses of Rs 17,000, balance in cash/near cash assets is Rs 22,000. This is equivalent to about five-six weeks’ reserves.
Health & life insurance: Reena has a health cover from her employer and her total life insurance is worth Rs 5 lakh in the form of a money-back policy.
Borrowings: Outstanding loan against gold is Rs 1.50 lakh and Rs 25,000 on credit card.
Savings & investments: Reena’s savings bank balance is Rs 2,000 and bank FD amounts to Rs 20,000. The cash value of her insurance policy is Rs 5 lakh and she has a recurring deposit of Rs 10,000.
Fiscal analysis
Reena’s spending is well within means. But the contingency fund is less. Health insurance is from employer and life cover is only through investment-oriented policies. While borrowing is within permissible limits, the outstanding on her credit card is an expensive proposition.
The way ahead
Contingency fund: Enhance contingency fund to Rs 50,000 in eight months. Of this, keep Rs 10,000 in the form of cash at home and rest in savings bank account linked to an FD.
Health & life Insurance: It is prudent to have an independent health cover of Rs 3 lakh each for the family. Since there will be the burden of a home loan in future, obtain a life cover of Rs 50 lakh through a term plan. Existing money-back policy is proving to be an expensive proposition. It is prudent to make it fully paid-up whenever possible.
Borrowing: She should repay credit card dues at the earliest.
Planning for financial goals
Home purchase: Achieving this in the next four years seems a little difficult. Ideally, Reena should wait for about seven years or reduce the budget for home purchase. In the meantime, once contingency fund is created and credit card debt is paid back, she should start a systematic investment plan (SIP) in a mutual fund scheme having about 75% equity and rest in debt-based products.
Son’s education & marriage: These goals are many years away. Once home buying is on track, Reena should start an SIP in an equity fund for financing son’s education and marriage.
Two-wheeler: There is an expected inflow from the money-back policy this year. After paying back the loan, she should use the balance amount for purchasing a two-wheeler.
Parental support: While this is more of a wish than an actual need, it can be funded from regular income.
http://timesofindia.indiatimes.com/business/india-business/You-must-have-enough-life-health-insurance/articleshow/18638673.cms
