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Here's a financial guide for couples in their late 20s with joint income of Rs 16 lakh

Here's a financial guide for couples in their late 20s with joint income of Rs 16 lakh

As the Rochlani's have aspirational goals, building liquidity is essential to meet short-term targets, says Financial Planner Lovaii Navlakhi

Financial planning for young married couple Financial planning for young married couple

Amit Rochlani and Surashree Degwekar, hailing from Pune, got married recently. Both are 26, chartered accountants by profession, and just starting their financial journey together. They want to do everything as soon as possible - buying a house, owning a car (they have already purchased one), overseas travel once a year and the first kid in a couple of years. The house they want to buy in 2019 would be upgraded as well. Weighed against their goals and aspirations, their cash inflow may not seem adequate unless some meticulous financial planning is done.

Between them, the Rochlanis bring home Rs 16.8 lakh a year while their annual expenses, including insurance premiums and EMI (for loans), amount to Rs 8.6 lakh. The family goals are well-thought-out and given their current phase of life, the couple can look forward to a rapidly growing income - between 7 and 12 per cent - for the next few years. It would be required to meet their goals as planned.

Amit has a personal loan of Rs 4 lakh and a vehicle loan of Rs 6.5 lakh for which he is paying an EMI of Rs 24,000 and Rs 12,000, respectively. Going for a car that cost them Rs 8 lakh has resulted in their net worth going in negative. But they have kept a tight rein on their spending and the savings rate is healthy. Therefore, disciplined investment of surplus will work in their favour to build a positive net worth.

Amit has put about 75 per cent of his current assets in illiquid investments such as Employees' Provident Fund (EPF) and Public Provident Fund (PPF), and nearly 25 per cent is lying in equity funds, equity shares and bank accounts. Understandably, there is a need to build liquidity in one's portfolio, but it must be done without affecting portfolio growth. As of now, 23 per cent of his portfolio is invested in growth-oriented assets, and the balance is in the stable asset class. An asset allocation of 35 per cent into debt funds (from current 75 per cent) and 65 per cent into equities (from 23 per cent) is recommended, considering their age, requirements and stated risk tolerance. Also, they do not have individual health cover and need to get an insurance of Rs 5 lakh each.

Priority Planning

The Rochlanis need to zero in on their priorities as they have some major commitments in the near future. Buying a property, building liquidity in the portfolio and starting a family would require huge amounts. So, it is crucial to monitor expenses, stick to the budget and redirect the disposable income into liquid investment options. To start with, an emergency fund should be built to take care of the expenses for three to six months. Next, they should have a medical corpus for Amit's parents (they are not dependent on him), built in two phases. A sum of Rs 4 lakh could be put together by setting aside the equity portfolio and starting a systematic investment plan (SIP) of Rs 15,000 a month till 2018. The second tranche of the corpus, as well as some additional funds for maternity care (this is over and above Surashree's health cover), should be ready by 2020. For this, the couple must save Rs 44,000 a month, for 24 months, starting from 2019. Post-2020, a 20 per cent rise in expenses has to be factored in for the baby.

As their current assets (see Table: Current Assets) would shrink significantly after meeting the short-term goals, purchasing a property for self-occupation, originally scheduled for 2019, should be postponed till 2022. The Rochlanis should also consider scaling down the budget to Rs 70 lakh (at today's value). Their plan was to upgrade and move into a bigger property in 2035. So, they can sell their first property in 2035 and buy a new one for Rs 1.5 crore (today's value) in the same year. While preparing the action plan, rental expenses have been eliminated from 2022 onwards, assuming they will be staying in their new house.

The savings rate of the duo is a healthy 39 per cent (see Table: Monthly Cash Flow) and it needs to be channelised into investments to build a well-diversified portfolio, a process already initiated through SIPs into mutual funds. To achieve all their goals, the portfolio should earn 10.25 per cent per annum post tax.

In the action plan, the inflation rate is taken as 6 per cent per annum. Life expectancy is assumed to be 90 for Surashree and 85 for Amit. All values for income, expenses and assets are current values.

To-do List

Insurance: Life cover: Amit has an existing life insurance cover of Rs 2.5 crore but it is not enough considering the cover required for future expenses, goals and liabilities. At present, he needs to buy an additional insurance of Rs 3.13 crore. Surashree does not have any insurance policy and must buy a life insurance cover worth Rs 5.01 crore. Part of it can be purchased after the baby is born as it also covers the child's education. Another key component is the personal accident cover, which protects against income stoppage due to permanent and total disability caused by any accident. Therefore, a personal accident cover with Rs 50 lakh sum insured is recommended for each spouse.

Health cover: Amit and Surashree should buy personal health cover of Rs 5 lakh each over and above their corporate cover. It is important to get health insurance at the earliest as medical costs are increasing, and most health insurance policies have a waiting period of three-four years for pre-existing illnesses. Amit and Surashree should also get standalone critical illness cover of Rs 20 lakh each. In addition, the couple should build a medical corpus for themselves, which will supplement their health cover post retirement.

Investment planning: The Rochlanis currently invest about Rs 27,000 a month in mutual funds, mainly equity funds, through SIPs. But there is a need to realign future investments and the current portfolio, keeping in mind their immediate requirements and long-term goals (see Table: Plan of Action). The couple should divert all future SIPs to liquid funds or short-term debts, at least for the next few years, until immediate requirements are met. As discussed earlier, the current equity investment portfolio is mapped for the first tranche of the medical corpus for his parents. Thus, there is a need to evaluate and look for opportunities to realign this portfolio to debt in a staggered manner.

Finally, financial planning is not a one-time exercise, and annual reviews will help in case these projections appear aggressive. It is also important to have a will in place to ensure that the assets are distributed in future as desired by them.

As told to Priyadarshini Maji

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Published on: Aug 10, 2017, 12:45 PM IST
Posted by: Priyadarshini Maji, Aug 10, 2017, 12:45 PM IST