This is a visual overview of the financial plan for a 30 year old salaried professional. It briefly demonstrates the steps involved in financial planning:
Checkout the full plan (26 page PDF) for details, assumptions and calculations involved in the plan.
Sachin Shah is a 30 year old Senior Software Engineer at an IT services company in Bengaluru. Sachin stays with his wife Anjali, who is a college professor, in a rented apartment. They have no children currently and planning a baby in the next 2 years.
Sachin’s parents stay in their hometown Ahmedabad, in their family owned house. His father is a retired government servant and his mother is a housewife.
7.2 Lakhs/ year
4.8 Lakhs/ year
* Amount required if the goal were to be achieved today.
Investments in different classes such as gold, equity, debt, real estate as well as cash in hand are considered as assets. Loans which include home loan, personal loan, vehicle loan, education loan etc are considered as liabilities. Some part of Sachin's goals will be taken care of by the current assets. For example, some part of retirement corpus will come from provident fund.
|Equity Mutual Funds||₹ 1,30,000|
|Stocks (equities)||₹ 40,000|
|Fixed Deposits||₹ 1,50,000|
|Employee Provident Fund (EPF)||₹ 2,50,000|
|Public Provident Fund (PPF)||₹ 10,000|
|Cash in bank (savings account)||₹ 30,000|
|Total Assets (A)||₹ 910,000|
|Total Liabilities (B)||₹ 4,50,000|
|Networth (A - B)||₹ 4,60,000|
About 33% of their assets come from gold, most of which is jewellery purchased during their wedding. It has emotional value attached to it and may never be used to achieve the financial goals. It is included over here because it may come in handy in emergencies.
Emergency Fund is a kitty which is been kept aside to face any unforeseen event in the future. It provides peace of mind and gives assurance that you are well prepared in short term to face any immediate expenses.
|Total monthly expenses||₹ 60,000|
|Emergency Fund Required (A)*||₹ 3,60,000|
|Current Available Funds|
|Cash in bank||₹ 30,000|
|Total Available Funds (B)||₹ 1,80,000|
|Shortfall (A - B)||₹ 1,80,000|
* Emergency Fund is considered for 6 months funds required to maintain your current lifestyle and EMIs.
Start a monthly recurring deposit (RD) of ₹ 5000 in her bank account for a year. On maturity convert the amount to an FD.
Start SIP (monthly cycle) of 10000 in the following debt mutual fund for a period of 1 year:
Sachin and Anjali are planning a child next year. They want to accumulate a corpus for their child’s college education. This fund should be available when their child turns approximately 18 years. So the fund should be available approximately 20 years from now.
The present value of college education is considered to be 40 lakhs i.e. if the child were to go to college this year, this is how much his/her college education would cost. ₹40 lakhs is a reasonable amount required for bachelors + masters in engineering/medicine at a private university.
Accumulate approximately ₹ 1.86 Crore (inflation adjusted) for child’s education within 20 years. With the proposed equity:debt allocation (check the full report for details), average expected return comes to 9.8%. Monthly investment amount comes to ₹ 15,000.
They expect their child to get married when he/she turns approximately 24. So the fund should be available approximately 25 years from now.
The present value of the wedding is considered to be 30 lakhs. The Shahs estimate that today this is how much a wedding ceremony would cost.
Accumulate approximately ₹ 1.3 Crore for child’s wedding within 25 years. With the proposed equity:debt allocation (check the full report for details), average expected return comes to 10.2%. Monthly investment amount comes to ₹ 5,000.
Retirement planning is the single most important financial goal common to every individual. It is the only financial goal in which a corpus would get spent over the course of decades! Retirement planning is non-negotiable.
The family's current annual expenses are ₹ 7.2 lakhs (monthly expenses of ₹ 60,000 times 12). Both Sachin's & Anjali's age is 30 and they wish to retire at 58, which is 28 years from now. With 6% inflation, in their first year of retirement they would need ₹ 37 lakh!
Their life expectancy is assumed to be 85 years. From the age of 58 to 85, their retirement corpus needs to generate income to pay for their expenses. Their expenses will continue increasing because of inflation and on the other hand the corpus would also generate some return. The calculation of retirement corpus is a bit mathematically involved. The final amount comes to ₹ 7.8 crore.
It is estimated that approximately ₹ 2.5 crores of the corpus will come from Sachin
and Anjali’s EPF contributions. Also the current mutual fund and stock investments
are estimated to generate ₹ 20 lakh by the time of retirement. So the shortfall of
7.8 - 2.5 - 0.2 = ₹ 5.1 crore needs to be achieved via other means
Accumulate approximately ₹ 5.1 Crore for retirement within 28 years. With the proposed equity:debt allocation (check the full report for details), average expected return comes to 10.2%. A 7% annual increase in SIP amounts is assumed. Monthly investment amount comes to ₹ 14,500.
After reviewing their current financial state and investment required the long term / short term goals, Preeti recommends Sachin to postpone his plan to purchase a car. There is a possibility of creating a fund for purchasing new / used car after Sachin has completed the creation of an emergency fund, as discussed above.
Postpone the purchase of car. A fund for purchasing a car can be created once the emergency fund is in place.
A family suffers a huge emotional loss and a possible financial loss due to the untimely death of the breadwinner. Emotional loss is irreplaceable, but a financial loss could be replaced by life insurance. We must calculate the sum insured by taking into account all the future financial needs of your family.
Calculations according to the Income Replacement method reveal that Sachin should have life insurance cover of ~ ₹ 3 Cr, whereas he has a life insurance cover of ₹ 50 Lakhs.
Surrender the LIC New Endowment Plan- 814 and use it's proceeds to fund shortfall of monthly investible surplus. Avoid savings linked policies due to the low return it offers. Read: Are endowment plans like LIC's Jeevan Anand a good investment option?
Sachin needs an additional insurance cover of ₹ 2.5 Crore.
Health insurance is a top priority in Financial Planning. As of now, Sachin only has the corporate health cover from his employer. The coverage amount is ₹ 3 lakhs. It is not sufficient in the long term. Anjali does not have any health insurance.
Sachin and Anjali both need a health insurance cover of at least ₹ 5 lakhs.
# Actual names of mutual funds and insurance policies have been redacted because the recommendations need to be monitored and may change from time to time. Financial advisors will monitor these for their clients and inform them if changes are required.