Financial Plan with Solutions of a Real Life Case Study

Note – This case study is published in Steven Fernandes book There is always a financial solution… published by Bestsellers18 which is a compilation of different case studies. Sharing here with permission of author.

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Name – Abhishek Goel (30)

Family – Father (67), Mother (63)

Resides in – Delhi

Occupation: Service

Job Details: Works as Chief Manager Claims for a Private General insurance company.

Background:

Abhishek is single and stays with his parents in his father’s house in Delhi. He has an elder brother who works abroad. Abhishek remembers that at an early age he got a first-hand experience on savings when his parents encouraged both the brothers to open a children’s bank account which was being operated from the school premises. Both brothers started saving Rs. 5 per month and this money was utilised in the next academic year to purchase some books, stationery, etc. His father used to work in an engineering firm while his mother was a teacher. When he was in the first standard, his father’s company faced lockout and for nearly 2 years the family survived on his mother’s income. His father got an opportunity to work in the gulf later and for some time the family’s finances were on track.

Again, tragedy struck when his mother had to give up her job due to health reasons. After working for a couple of years abroad, his father’s firm closed down and he had to come back. His mother started taking tuitions at home to make ends meet. Since the convent school where the siblings were studying were aided by the government, they did not have to pay any fees for their secondary school education. Abhishek’s mother ensured that every expense was monitored and followed a strict budget. Both the brothers understood the family’s grim financial situation and consciously supressed their desires for story books/ toys etc. The difficult financial situation made the brothers realise that good education and qualification was the single most path to getting a good job and ensure financial stability. With the generous help from charitable donors Abhishek and his brother got interest free loans to complete their higher education. Abhishek completed his BE in Automobile engineering while his brother did is Hotel management.

Even during his first few years of college, Abhishek had started earning by giving tuitions. Part of this money was deposited in his bank and rest was given to his mother to manage the family’s expenses. Abhishek has had a very good rise in his career in the last 9 years since he has been working and presently he is in a very good position with a well-known General insurance company. Since he has been only exposed to traditional investment options like Insurance, Post office and FD schemes, Abhishek started his investment journey from 2007 with these products. To save tax he purchased traditional insurance policies and invested the rest in Fixed deposits. Even then he has been able to create a good investment basket because he has kept his expenses to the minimum and tried to save as much as he could.

Last year he booked an under construction flat worth Rs. 62 lakhs for which he paid the down-payment of 10% from his own savings. He is expected to get possession of the flat by December 2018. So far, he has taken a loan of Rs. 18.50 lakhs and he intends to try and pay as much as he can from his own sources in the next 2 years before possession.

Savings habit: In almost all cases with a few exceptions, our parents are the initiators into the world of savings and investments. Abhishek too understood the importance of savings through his parents who encouraged him right from his school day. He had never looked back ever since. Most of us lose our way once we get caught up in our work and other family responsibilities. Abhishek continues this habit till today and now savings has become an integral part of his responsibilities.  He only needs guidance on how/ where to invest the savings.

Insurance as an investment: Most people buy insurance as an investment product or rather it is sold that way to make it attractive for the buyer. Investment oriented insurance policies are of two types – Traditional and Unit linked. Traditional policies typically invest in government bonds, approved securities and instruments which provide fixed income while Unit linked policies invest in instruments varying from government bonds to equities as per the fund chosen by the investor.

Traditional insurance policies typically don’t provide more than 5-6% returns over the long term while equity oriented funds in unit linked policies can fare better than traditional policies in the long run. Therefore, traditional insurance policies don’t serve as a good investment for the long term. How can a product which cannot beat inflation help you to reach your long-term goals? Abhishek made an early start but due to lack of knowledge and with a view of saving tax, he invested in traditional insurance policies, allocating a good amount of premium.

What is the present situation?

Source of Income
Source	Category	Per month
Abhishek	Salary	90000
Total Monthly Income		90000
Total Annual Income		1080000

Basic Numbers

Monthly Income: Rs 90000

Expenses	Per month	Annual
Household	10000	120000
Home loan EMI	19500	234000
Personal expenses	10000	120000
Insurance premium	17978	215740
Total	57478	689740

Monthly surplus: Rs. 32522

Networth Statement

Assets	Rs.	Liabilities	Rs
Savings Account	105000	Home loan	1850000
Fixed deposits	800000
EPF	532000
Insurance Cash value	454758
Equity Mutual funds	1070000
Shares	476000
Under Construction property	2500000
Total	5937758		1850000
Networth	4087758

 

 

 

 

 

 

 

 

 

 

 

ASSET ALLOCATION

Allocation	Value	%
Equity	1546000	26.04
Debt	1891758	31.86
Property	2500000	42.10
	5937758	100.00

 

Findings:

Emergency fund: Apart from the savings account, the fixed deposits provide a decent back up In case of any emergency.

Life insurance: Abhishek is covered for Rs. 1.09 crores through 1 term pan of 1 crore and two traditional plans. He also has a traditional pension plan for which his monthly contribution is Rs. 8145 and the maturity is in 2041. He has a limited premium traditional policy where the last payment is to be done next year. The last policy is an endowment policy which will mature in 2028.

Health Insurance: Abhishek is covered for Rs. 5 lakhs through his employer group insurance policy. His parents are covered for Rs. 2 lakhs each through a separate policy. He also has a separate health cover of Rs. 15 lakhs through a combination of mediclaim and top up policy.

Investments: Investments are very well diversified into debt and equity with debt comprising 55% of the allocation and equity at 45%. Property has been excluded as its for self-consumption.

Liabilities: Presently there is only 1 loan which is a home loan taken on the under-construction property.

Loans	Original Amount	Interest & Term	EMI	Present Outstanding loan
Home loan	₹ 19,00,000	9.75%, 15 years	₹ 19,500	₹ 18,50,000

 

Abhishek has opted for EMI payments (instead of only pre EMI interest) as it enables him to claim tax benefits on both principal and interest payments as well as loan outstanding keeps reducing with each EMI payment.

Risk Profile: Moderate

Recommendations:

Emergency fund: Abhishek needs to maintain an emergency fund of Rs. 1.75 lakhs, which should take care of nearly 3 months of expenses. Presently he has maintained Rs. 1.05 lakhs in savings account which can be maintained as it is and additionally he should move Rs. 70000 from his FDs into a liquid fund.

Accident Insurance: Abhishek should take a personal accident comprehensive policy which will cover for accidental death, permanent and partial disability including weekly/monthly compensation for loss of work due to total temporary disability. A PA cover of Rs. 50 lakhs with a TTD cover of Rs. 15 lakhs are suggested. The premium for this will be approximately Rs. 7000

Life Insurance: Considering the financial goals and outstanding liabilities, Abhishek’s cover is adequate. He needs to stop the traditional pension policy as well as the endowment policy which matures in 2028. The yield on these policies are less than 6% and hence coming out of those will make sense now rather than continue them till maturity which is more than 12 years to 20 years from now. Surrender of the 2 policies will fetch him approximately Rs. 3 lakhs. He should revisit the cover post marriage.

Health Insurance: The present cover is adequate as per his age. He should include his wife’s name when he gets married next year.

Debt Management: Even though the actual loan approval amount is Rs. 50 lakhs, Abhishek should not take the full disbursement. He should try and use his own sources to pay for the property and keep the loan to less than Rs. 30 lakhs. A higher loan and EMI can hamper future goals. He can use the Rs. 3 lakhs from insurance surrender to pay for slab wise payments. The policy surrender will also enable the increase in surplus amount every month.

 

Change in Cash flow post insurance surrender
Expenses	Per month	Annual
Household	10000	120000
Home loan EMI	19500	234000
Personal expenses	10000	120000
Insurance premium	4000	48000	Surplus
Total	43500	522000	46500

Financial Goals:

Sr.No	Financial goals	No of years to goal	Year	Present Value	Future value	Inflation considered
1	Marriage	1	2017	400000	436000	9%
2	Buying a Car	2	2018	400000	466560	8%
3	Educational Funding for 1 child	20	2036	300000	1681323	9%
		21	2037	300000	1832642	9%
		22	2038	300000	1997580	9%
		23	2039	300000	2177362	9%
		24	2040	1000000	7911083	9%
		25	2041	1000000	8623081	9%
4	Retirement at 55	25	2041	360000	1953876	7%

1. Marriage (2017)

Current value: Rs 4 lakh

Future Value: Rs. 4.36 lakh

Status of goal 1:

Abhishek does not want to spend too much on marriage and considering the fact that the marriage expenses will be shared with his spouse, he would not like to exceed Rs. 4 lakhs. A part of the Fixed deposits can be used for this goal.

Returns expected in fixed deposits: 6% post tax.

 2. Buying a car (2018)

Current value: Rs 4 lakh

Future Value: Rs. 4.66 lakhs

Status of goal 2:

He needs to start Sip of Rs. 18500 in ultrashort debt funds for a period of 24 months to achieve this goal.

Returns expected in Ultrashort debt funds: 6% post tax over the required time horizon.

3. Educational funding for 1 child (2036 – 2041)

Current value: Rs. 32 lakhs

Future Value: Rs. 2.42 crores

Status of goal 3:

Considering the long-term nature of this goal, Abhishek needs to invest Rs. 14000 per month for 25 years in a combination of largecap and balanced funds. Due to the present surplus, he can easily invest for this goal.

Returns expected in the mutual funds portfolio: 13% over the required time horizon.

4. Retirement Planning (2041)

Present Annual expense (Excluding children’s expenses and EMI’s) –Rs. 3.60 lakhs

Future Annual Expense – Rs. 19.53 lakhs

Corpus required – Rs. 4.53 crores.

(Inflation considered: 7%, Returns on corpus during retirement 9%, Expected life expectancy at 85 years)

Status of retirement goal– One principle which Abhishek has followed when he left his last organisation in 2014 is to transfer his EPF to the new employer rather than withdraw which most people do. With compounding and regular contribution, the EPF turns out to be a good amount during retirement. Considering a 5% increase in basic year on year his EPF in the year 20141 should be worth Rs. 1.93 crores. The mutual funds and equity shares if maintained that long can fetch him Rs. 1.45 crore and Rs. 1.56 crore respectively. These 3 assets are sufficient to create a good retirement corpus as per today’s needs.

Most of us plan retirement when there are either 10 or less years for one to retire. That leaves very little time to enable compounding of your investment and the savings and investments required in the short time will also be huge.

Taxation: Abhishek’s EPF and life insurance premiums of 2 policies (Term and 1 traditional) exceed the limit of Rs. 1.5 lakhs provided under 80C.  He is also utilizing the 80D deduction up to Rs. 25000 due to health insurance premium of self and parents. He can avail the home loan interest benefit on under construction property in 5 equal instalments from the year of completion of his flat.

Conclusion – It’s truly said, “Experience is the best teacher”. Abhishek’s life is a live example of how his childhood period of financial turmoil has moulded him to be a better saver and investor. At his age, he had done a fairly good job of creating a good investment basket. There are several like him who have an opportunity to choose what is right. Many of his age, having similar salary may not have accumulated as much as he has. In this age of uncertainty, it’s very critical that the younger generation focuses on saving and building up a good corpus right from the first salary. Else there will always be regrets and “I should have done that” sighs when you evaluate your life in your 40s and 50s.

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Note – This case study is published in Steven Fernandes book There is always a financial solution… published by Bestsellers18 which is a compilation of different case studies. Sharing here with permission of author.

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