We are living in a world which no longer offers any 'Guarantee'!
Everyone
from Government to Corporate, is caught in the downward spiral of Economic Slowdown. And the worst affected are the smallest unit of
economy… ‘Individuals and their personal finance’! In the following case the
family has suffered with double whammy of salary cut along with increase in
expenses due to inflation. How will they fight back…I have tried to get the
answers through the review of their financial plan.
Also I am glad that they have implemented some of the recommendations given in the first financial plan.
A year may be a short period when it comes to financial planning, but for the Bansodes, it seems long enough given the changes their finances have undergone, all for the worse. When the Bansodes approached us nearly a year ago, we suggested changes which left them with a surplus of Rs 1,416 per month after investments for their goals. Today, not only has their monthly income fallen by Rs 5,000, but their expenses have gone up by Rs 4,840. More significantly, none of their goals, barring retirement, seem achievable now.
Given the double whammy of reduced income and increased expenses, the Bansodes will either have to find a new source of income to fund their goals, cut down on their financial outgo, or rein in their targets.
The original plan
When the Bansodes contacted us, Ravindra was working in the aviation industry and lived in Mumbai with his wife Sharmila, 39, his father Pandurang, 75, mother Kamal, 70, and daughters Ananya, 13, and Maahi, 8. As the only earning member of the family, he brought in a monthly income of Rs 45,000.
After accounting for their expenses, which included a home loan EMI of Rs 13,543, a personal loan EMI of Rs 3,265 and an insurance premium of Rs 1,320 per month, they were left with a surplus of Rs 10,680 per month. This sufficed for most of their goals, but the Bansodes were advised to rearrange their insurance portfolio so that they would have had adequate protection.
They were helped by the fact that their portfolio was diversified in equity, debt and cash, and given their age and family size, they had an impressive savings rate of about 20 per cent of the salary.
Given the double whammy of reduced income and increased expenses, the Bansodes will either have to find a new source of income to fund their goals, cut down on their financial outgo, or rein in their targets.
The original plan
When the Bansodes contacted us, Ravindra was working in the aviation industry and lived in Mumbai with his wife Sharmila, 39, his father Pandurang, 75, mother Kamal, 70, and daughters Ananya, 13, and Maahi, 8. As the only earning member of the family, he brought in a monthly income of Rs 45,000.
After accounting for their expenses, which included a home loan EMI of Rs 13,543, a personal loan EMI of Rs 3,265 and an insurance premium of Rs 1,320 per month, they were left with a surplus of Rs 10,680 per month. This sufficed for most of their goals, but the Bansodes were advised to rearrange their insurance portfolio so that they would have had adequate protection.
They were helped by the fact that their portfolio was diversified in equity, debt and cash, and given their age and family size, they had an impressive savings rate of about 20 per cent of the salary.
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Our suggestions
To begin with, Shilpi Johri of Arthashastra Planning suggested that the Bansodes build a contingency fund since Ravindra was the only earning member. For this, they needed to save about Rs 1.2 lakh, which could be arranged by allocating the fixed deposit and cash to this goal, and directing the surplus amount after investing for other goals.
The couple was also asked to beef up theirlife insurance since they had two expensive policies, which provided inadequate cover. Johri advised them to increase the insurance coverage to at least Rs 1 crore. They were also asked to surrender their insurance plans and divert the premium of Rs 1,321 that they would save to fund the new cover.
The family's goals included saving Rs 8 lakh and Rs 10 lakh for the education of Ananya and Maahi after 9 and 14 years, respectively. For Ananya, they were asked to use their direct equity worth Rs 1.58 lakh, along with the equity fund portfolio of Rs 26,000, which would suffice for about half the goal. For the remaining corpus, they were asked to start an SIP of Rs 1,808 per month in equity funds. For their younger daughter's education, they were asked to surrender the child plan that they had bought, and along with the surrender value of Rs 35,000, they were asked to invest Rs 2,276 per month.
For their elder daughter's marriage, the couple wanted to build a corpus of Rs 15 lakh in 14 years. Their PPF balance gave them Rs 2.5 lakh. For the remaining amount, they were asked to save Rs 4,591 per month in equity funds. For the corpus of Rs 22 lakh for Maahi's marriage after 17 years, they were asked to wait, as their surplus did not allow further investment.
For retirement, the couple needed a corpus of Rs 1.1 crore in 20 years. The EPF balance would have sufficed for about 95 per cent of the corpus, while for the balance, they would have to invest Rs 421 in SIPs.
The new plan
As mentioned earlier, the Bansodes' income has fallen and expenses have increased, which means that practically their entire surplus has been wiped out and their investments have fallen off track. The surplus has dropped from Rs 10,680 to Rs 1,000.
Besides, Ravindra did not follow the advice to reduce his equity portfolio to 6-7 stocks and continues to hold about 20. Given the market conditions, the portfolio has been slashed by about Rs 27,000 to Rs 1.31 lakh.
Bansode also failed to build the contingency fund as recommended, though he has decided to repay his home loan with the earmarked amount. This will help him save Rs 5,560 starting next month. Though this provides the Bansodes with some breathing space, there is little to cheer.
Their inability to start the requiredinvestments last year has resulted in the shooting up of the monthly investment for each goal. However, it seems the Bansodes don't understand the gravity of the situation, for they have scaled up the corpus for each goal. This makes it unlikely to achieve the targets since their current surplus will barely suffice for a couple of goals.
The Bansodes now want to save Rs 12 lakh and Rs 15 lakh for their children's education, instead of the original targets of Rs 8 lakh and Rs 10 lakh, respectively. The situation is the same for their other goals, which seem unlikely to be achieved at the current juncture.
Are they on the right track?
Apart from buying insurance worth Rs 50 lakh, the Bansodes have not followed any of the recommendations. They did not cut down their stock portfolio and since almost all the scrips are in the red now, Johri thinks it makes more sense to hold them for some more time. However, they must not invest more in direct equity.
The Bansodes hold only Rs 50,000 as cash, and since Ravindra is the only earning member, they must build a contingency fund. From next month onwards, they will also save Rs 5,560 since Ravindra plans to repay the personal loan (he had increased the EMI from Rs 3,265 to Rs 5,560 last year). This amount, along with the current surplus of Rs 1,000 must be saved for at least a year to building the contingency fund equal to three months' expenses.
The only silver lining is that they need to invest only Rs 111 per month for the retirement corpus, which should be easy. Once they build the emergency fund, the family can take stock of the surplus and the time they have to invest for their goals.
"The Bansodes have been hit badly due to the rising expenses and, if possible, a family member should consider part-time work to supplement the income," says Johri.
(Financial plan by Shilpi Johri, CFP, Arthashastra Planning)
To begin with, Shilpi Johri of Arthashastra Planning suggested that the Bansodes build a contingency fund since Ravindra was the only earning member. For this, they needed to save about Rs 1.2 lakh, which could be arranged by allocating the fixed deposit and cash to this goal, and directing the surplus amount after investing for other goals.
The couple was also asked to beef up theirlife insurance since they had two expensive policies, which provided inadequate cover. Johri advised them to increase the insurance coverage to at least Rs 1 crore. They were also asked to surrender their insurance plans and divert the premium of Rs 1,321 that they would save to fund the new cover.
The family's goals included saving Rs 8 lakh and Rs 10 lakh for the education of Ananya and Maahi after 9 and 14 years, respectively. For Ananya, they were asked to use their direct equity worth Rs 1.58 lakh, along with the equity fund portfolio of Rs 26,000, which would suffice for about half the goal. For the remaining corpus, they were asked to start an SIP of Rs 1,808 per month in equity funds. For their younger daughter's education, they were asked to surrender the child plan that they had bought, and along with the surrender value of Rs 35,000, they were asked to invest Rs 2,276 per month.
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For their elder daughter's marriage, the couple wanted to build a corpus of Rs 15 lakh in 14 years. Their PPF balance gave them Rs 2.5 lakh. For the remaining amount, they were asked to save Rs 4,591 per month in equity funds. For the corpus of Rs 22 lakh for Maahi's marriage after 17 years, they were asked to wait, as their surplus did not allow further investment.
For retirement, the couple needed a corpus of Rs 1.1 crore in 20 years. The EPF balance would have sufficed for about 95 per cent of the corpus, while for the balance, they would have to invest Rs 421 in SIPs.
The new plan
As mentioned earlier, the Bansodes' income has fallen and expenses have increased, which means that practically their entire surplus has been wiped out and their investments have fallen off track. The surplus has dropped from Rs 10,680 to Rs 1,000.
Besides, Ravindra did not follow the advice to reduce his equity portfolio to 6-7 stocks and continues to hold about 20. Given the market conditions, the portfolio has been slashed by about Rs 27,000 to Rs 1.31 lakh.
Bansode also failed to build the contingency fund as recommended, though he has decided to repay his home loan with the earmarked amount. This will help him save Rs 5,560 starting next month. Though this provides the Bansodes with some breathing space, there is little to cheer.
Their inability to start the requiredinvestments last year has resulted in the shooting up of the monthly investment for each goal. However, it seems the Bansodes don't understand the gravity of the situation, for they have scaled up the corpus for each goal. This makes it unlikely to achieve the targets since their current surplus will barely suffice for a couple of goals.
The Bansodes now want to save Rs 12 lakh and Rs 15 lakh for their children's education, instead of the original targets of Rs 8 lakh and Rs 10 lakh, respectively. The situation is the same for their other goals, which seem unlikely to be achieved at the current juncture.
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Are they on the right track?
Apart from buying insurance worth Rs 50 lakh, the Bansodes have not followed any of the recommendations. They did not cut down their stock portfolio and since almost all the scrips are in the red now, Johri thinks it makes more sense to hold them for some more time. However, they must not invest more in direct equity.
The Bansodes hold only Rs 50,000 as cash, and since Ravindra is the only earning member, they must build a contingency fund. From next month onwards, they will also save Rs 5,560 since Ravindra plans to repay the personal loan (he had increased the EMI from Rs 3,265 to Rs 5,560 last year). This amount, along with the current surplus of Rs 1,000 must be saved for at least a year to building the contingency fund equal to three months' expenses.
The only silver lining is that they need to invest only Rs 111 per month for the retirement corpus, which should be easy. Once they build the emergency fund, the family can take stock of the surplus and the time they have to invest for their goals.
"The Bansodes have been hit badly due to the rising expenses and, if possible, a family member should consider part-time work to supplement the income," says Johri.
(Financial plan by Shilpi Johri, CFP, Arthashastra Planning)
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