Case Study : Financial Planning of a 30 year Old Salaried Professional

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:

  • Building an emergency fund
  • Planning for goals like child's education, wedding etc.
  • Retirement planning
  • Insurance planning

Checkout the full plan (26 page PDF) for details, assumptions and calculations involved in the plan.

Sachin's Family Background

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.

Sachin's & Anjali's goals

They don't have any children yet but they are planning for one in the next 2 years. Along with their long term and short term goals like retirement and car, they have a desire to accumulate a corpus for their future child's education and wedding.

Emergency Fund is a goal added by the advisor after analyzing their finances.

  • Goal
  • Target Year
  • Cost Today*
  • Years to Goal
financial planning goal: kid's education

Child’s Education

2039

40 Lakhs

20

financial planning goal: daughter's wedding

Child's Wedding

2044

30 Lakhs

25

financial planning goal: rainy day fund or emergency fund

Emergency Fund

Immediate

3.6 Lakhs

0

financial planning goal: retirement

Retirement

2049

7.2 Lakhs/ year

28

financial planning goal: buy a car

Car

2021

10 Lakhs

2

  • Goal
  • Target Year
  • Cost Today*
  • Years to Goal

* Amount required if the goal were to be achieved today.

Cashflows

Understanding the current cash flow is vital to the financial planning process as it helps determine the investible surplus. Many people underestimate the true extent of their expenses until the advisor asks them to jot down each expense. In this step the advisor may also suggest changes to bring down the expenses if they are found to interfere with achievement of goals.

  • Total Income
  • Contribution to Expenses
  • Surplus Available for Investments
financial planning goal: husband's cash flows (income and expenses)

80,000

40,000

40,000

financial planning goal: wife's cash flows (income and expenses)

50,000

20,000

30,000

financial planning goal: analyzing current assets and liabilities
financial planning goal: analyzing current assets and liabilities

Current Assets & Liabilities

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.

Assets Details Amount
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
Gold ₹ 300,000
Total Assets (A) ₹ 910,000
Liabilities Details Amount
Personal Loan 4,50,000
Total Liabilities (B) ₹ 4,50,000
Networth (A - B) ₹ 4,60,000
Observation

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.

Goal Planning

financial planning goal: rainy day fund or emergency fund

Emergency Fund

financial planning goal: rainy day fund or emergency fund

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.

Requirements
Total monthly expenses ₹ 60,000
Emergency Fund Required (A)* ₹ 3,60,000
Current Available Funds
FD ₹ 1,50,000
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.

Recommendation

Start a monthly recurring deposit (RD) of ₹ 5000 in her bank account for a year. On maturity convert the amount to an FD.

Recommendation

Start SIP (monthly cycle) of 10000 in the following debt mutual fund for a period of 1 year:

  • XXXXX# Liquid Fund (Growth) - Direct Plan OR
  • YYYYY# Liquid Fund (Growth) - Direct Plan
financial planning goal: kid's education

Child’s Education

financial planning goal: kid's education

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.

40
Lakhs

Present Value (2019)
Inflation 8%*
20 years

1.86
Crore

Value in 2039

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.

Action Plan

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.

Recommendation
  • Start a monthly SIP of ₹ 6500 in XXXX# Index Fund (Direct Plan). This is an equity fund.
  • Start a monthly SIP of ₹ 4500 in XXXX# Ultra Short Fund (Direct Plan). This is a debt fund.
  • Continue your existing ELSS (monthly SIP) of ₹ 4000 in XXXX# Tax Saver Fund.
financial planning goal: son's wedding

Child's Wedding

financial planning goal: son's wedding

They expect their child to get married when he/she turns approximately 24. So the fund should be available approximately 25 years from now.

30
Lakhs

Present Value (2019)
Inflation 6%*
25 years

1.3
Crore

Value in 2044

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.

Action Plan

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.

Recommendation
  • Start a monthly SIP of ₹ 4000 in XXXX# Large Cap Fund (Direct Plan).
  • Start a monthly SIP of ₹ 1000 in XXXX# Hybrid Fund (Direct Plan).
financial planning goal: retirement

Retirement

financial planning goal: retirement

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.

7.2 Lakhs
per year

Present Value (2019)
Inflation 6%*
28 years

37 Lakhs
per year

Value in 2044

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!

37 Lakhs
per year

Present Value (2019)
Life Expectancy 85 years
Post Retirement Return on Corpus

7.8
Crore

Value in 2044

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.

Note

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

Action Plan

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.

Recommendation
  • Start a monthly SIP of ₹ 3500 in XXXX# Multi Cap Fund (Direct Plan).
  • Start a monthly SIP of ₹ 8000 in XXXX# Large Cap Fund (Direct Plan).
  • Start a monthly SIP of ₹ 3000 in XXXX# Ultra Short Fund (Direct Plan).
financial planning goal: buy a car

Purchase a Car

financial planning goal: buy a car

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.

Recommendation

Postpone the purchase of car. A fund for purchasing a car can be created once the emergency fund is in place.

financial planning goal: life insurance

Life Insurance Planning

financial planning goal: life insurance

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.

1.5 Crore

Current Cover

3 Crore

Required Cover

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.

Recommendation

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?

Recommendation

Sachin needs an additional insurance cover of ₹ 2.5 Crore.

  • Top up the existing term insurance plan or buy a new life insurance term plan.
  • We recommend the term plan by XXXX# Insurance Company. This policy offers premium waiver in case of disability due to accident.
  • Select a term of 30 years which covers you till age 60. Please mention details of your existing policies/health conditions/habits etc. while applying for this policy.

financial planning goal: health insurance or mediclaim

Health Insurance Planning

financial planning goal: health insurance or mediclaim

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.

financial planning goal: health insurance for husband
Sachin

3 Lakhs

Current Cover
financial planning goal: health insurance for wife
Anjali

Nil

Current Cover

Sachin and Anjali both need a health insurance cover of at least ₹ 5 lakhs.

Recommendation
  • Purchase XXX# family floater policy (variant 2) from ABC# Health Insurance or YYY# Family Floater plan by XYZ# General Insurance Company.
  • If you want maternity benefit from the health insurance plan then you can consider XYZ# Family Floater plan but the waiting period for maternity benefit is 2 years since the commencement of the policy. And this is least waiting period any policy offers for maternity.

Disclaimer

# 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.

  • The projected growth rates in this plan should not be construed as prediction or guarantee of future performance.
  • This plan needs to be reviewed at least once every year
  • This financial plan is not generic in nature. It has been personalized for a particular client after taking into account their needs, goals, available resources and the qualitative data (like risk tolerance level, investment habits and lifestyle) inferred based on discussions between the advisor and the client.
  • Names and identifying details have been changed to protect the privacy of individuals.
  • Do not follow this plan blindly without consulting an investment advisor. Preeti Zende and DhanWise will not be responsible for any losses incurred due to blindly following this plan.