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Figure Out Your Priorities to Move Forward

Figure Out Your Priorities to Move Forward

IT professional Priya Gupta is planning to get married, but she has dependent parents and inadequate insurance. Setting priorities and working on action items will help her achieve key goals, says financial planner Pankaaj Maalde.

Financial planning Financial planning

Priya Gupta, 28, is a senior software developer in an IT firm located in the DelhiNCR. She is planning to get married soon and wants to get her finances back on track, buy a car and go on a dream vacation. Her mother, aged 50, and father, 54, live in Jharkhand and they are financially dependent on her. Gupta maintains a contingency fund and controls expenses with a proper savings ratio, which are, indeed, good moves at her age. However, she solely depends on the employer-provided health insurance for any medical emergency and has ignored life and disability insurances, which are not ideal financial decisions (see tables Current Assets and Inflow-Outflow). She should review the following plan and rebalance her portfolio periodically, preferably every year.

Do-it-now Tasks

Contingency planning: Gupta is advised to keep a contingency fund that equals three months' expenses. An amount of `50,000 from her savings account and another `50,000 from her fixed deposits have been earmarked for contingency (see table Contingency and Risk Planning). When her income goes up, she must build an emergency fund to meet six months' expenses. The money kept for this purpose should be invested in ultra-short-term funds and must only be used in case of an emergency. The key to success is discipline.

Life insurance: She has a group life cover of `15 lakh but it is not adequate, and she requires an additional life cover of `75 lakh. She should buy a term plan for 35 years, which will cost her around `8,000 per annum. While buying a new insurance, disclose all information, including health history, habits (if any) and existing insurance plans in the proposal form.

Health and disability cover: Gupta has a health insurance cover worth `5 lakh provided by her company. But it is not advisable to rely solely on employer-provided health insurance. She should immediately buy an additional policy as the existing one will not be valid when she leaves her job or retires. Moreover, benefits may get reduced every year, and it will be difficult to get a new health cover at a later age if one is suffering from a specific illness. The new policy may not cover the medical condition or there could be a long waiting period. Therefore, she should buy a health plan for `5 lakh sum assured, which will cost her around `5,000 per annum. Besides, she should buy a health cover worth `3 lakh for her parents. It will cost another `18,000 a year. Gupta should continue with the employer-provided health insurance plan and must port the same to an individual policy if she leaves her job. She should also get a critical illness cover worth `25 lakh and another `25 lakh for accidental disability, totalling around `9,000 annually. The premium paid up to `25,000 for self and family and an additional `30,000 paid for parents will be deducted from her total income u/s 80D of the Income Tax Act.

Planning for Future Goals

Now that the immediate to-do list is taken care of, Gupta must plan for future goals that require massive changes in investment pattern (see table Asset Allocation).

Marriage: The software engineer is planning to marry after a year and wants to spend around `7 lakh on that occasion. Her fixed deposit of `1 lakh is allocated towards this goal. Additionally, she can invest her monthly surplus of `16,000 in ultra-short-term funds. Even then, her marriage corpus will be `3 lakh, and she must cut costs. Gupta should keep the budget tight and must not opt for any personal loan with high interest rates.

Retirement: Retirement savings are paramount. Gupta is planning to retire at 60, and she will require a corpus of `3.5 crore to take care of her retired life till she is 80. The corpus has been worked out assuming that household expenses will be `18,000 per month in present term plus 7 per cent inflation.

Most of her investments have been allocated to fund her retirement. Plus she must start a monthly investment of `6,000 in a diversified equity mutual fund scheme via SIP to build the desired corpus. She can also consider investing in ELSS schemes for tax benefits. But right now Gupta has limited resources, and it may help if she starts investing for retirement a year later, sometime after her marriage (see table Retirement Planning).

Buying home: Ten years from now, buying a home will incur a total cost of `50 lakh in present value (future value will be `1 crore) and Gupta needs to build a corpus of `20 lakh for down payment at the time. It is a very long-term goal and needs to be reviewed periodically. She has to start a monthly investment of `10,000 in a diversified equity scheme via SIP to accumulate the down payment. As funds are not immediately available for this goal, she should start investing after a year (see table Home Purchase).

Dream vacation, car purchase: After two years, Gupta would like to go on a dream vacation with her family, which will cost her `1.5 lakh. She would also like to buy a car after four years and the cost will be around `6 lakh in present terms. But looking at her present assets and surplus, the goals do not seem realistic. She should concentrate on life's major goals first as discussed above and postpone these two till her income rises substantially. Also, she should buy a less expensive car or a pre-owned vehicle.


As told to Priyadarshini Maji

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Published on: Jan 10, 2018, 11:51 AM IST
Posted by: Priyadarshini Maji, Jan 10, 2018, 11:51 AM IST