Financial Planning – Confused

POSTED BY swetha ON February 15, 2012 5:26 pm COMMENTS (7)

Hi,
My name is Swetha. Me and my husband are confused on where to invest our money and which will give us best returns. Following are our details
We, both combined are earning 95K (take home) per month.
My age : 25
My husband : 27
1) Our plan to save per month is 50K out of which we want to put atleast 20K in savings account so that it can be used for any urgent needs. Suggest if this is better to save this 20K amount.
2) Our invesmets till now per annum:
Health Insurance Premium for parents– 14K
ULIP: 20K
MF: 24000
i) We are first planning for a plan which will give lump sum amt. so that it can be useful for our children\’s education or marriage — We want to get 25 Lakhs in next 21 years. — So for this we are choosing Jeevan anand with sum assured 12Lakhs. Is this good to start investing now or is it better to invest once the child is born.
ii) We want retirement return of 1 crore after 30 Yrs from down the line. For this is it fine for Endowment plus plan (plan no 14) or is there any better option?
iii) My husband wants to take pure life insurance plan– Please suggest which is good.
iv) If we put our avg hike will be 10% per year, which will be the right time to take house loan(our first priority is for points i,ii). So after i and ii from which age we can start investing on house?
v) Also we have no idea on MF\’s extra. So Can you please suggest on what it is and where to invest on this.
Overall, We would like to know the best Financial plan for the people at the age 25 to 27,who earns 90K/month, keeping 10% hike every Year from age?

7 replies on this article “Financial Planning – Confused”

  1. Dear Swetha, First of all please try to create an emergency fund of at least 6-9 months of your expenses + investments. The figure comes out around 50K mly for you So your target should be a fund of some where 3-4L Rs.

    Apart from this, for the combined mly income of 95K Rs. the term cover requirement is around 1.2 Crore to 1.5 Crore Rs. Why? 95K mly = around 12L yly.

    @ 10-12 times multiple – the term cover requirement comes out around 1.2 to 1.5C.

    Out of this 1.2 crore Rs. you people should go for either 75+50 or 100 +50L cover split between both of you.

    The Jeevan ‘anand part is already discussed above by dear justgrowmymoney, hence not commenting any more.

    Please update with your inputs.

    Thanks

    Ashal

  2. Jeevan Anand Benefit illustration is in the link below:
    http://www.licindia.in/endowment_005_illustration.htm

    The link to calculate returns for an Endowment Plan is here:
    http://justgrowmymoney.wordpress.com/downloads/

    If you fill the sample premium for 25 years (-4535) and put the final return (Best case 241000) in the 26th year(=>ENd of 25th year and beginning of 26th year) you get a return of about 5.6%.

    You can use this calculator to find IRR of several other premium paying terms and also Moneyback plans. If you get an intermediate payback then put the net amount paid for that year (Payout received minus Premium outgo).

  3. swetha says:

    Hi Ashal,

    Our monthly expenses fell in 30-35K.

    Along with the above questions can you please explain how returns on jeevan anand are calculated?

    Thanks,
    Swetha.

  4. Dear Swetha, although your mly expenses are variable still it ‘ll be in a band on an average say 30-35K or 35-40K……

    Please quote the band applicable to you.

    Thanks

    Ashal

  5. Dear Swetha, may I know the mly expenses of both of you combined as on date?

    Thanks

    Ashal

    1. swetha says:

      Hi Ashal,

      Our monthly expenses vary from month to month. Apart from our monthly expenses we target to save 50K per month for sure.

  6. Swetha – It is not common to see someone taking up serious financial planning at around 25. Hats off for that. I would say you folks are in a sweet spot as far as cash inflows are concerned. Lets see how to unfold a plan for you;

    1) Pure Life insurance – Term insurance:
    I assume you and your spouse bring in comparable income each month (~50,000) post tax which means the pretax pay is about 8 Lacs each per annum. The rule of them thumb is to get insured for 7-10 times your annual income => Each of you must be insured for about 75 lacs. At your age the annual premium must be in the 7k range for each (including taxes). Take this first before doing anything else. Increase the coverage as salary increases. Take coverage for 30/35 years- until your financial obligations will be pending (say Kid’s education/marriage)

    2) Health cover:
    I assume your employers must be covering you folks for 3-5 lacs each but this job is not a permanent one and you know you will be switching sooner or later. The medical benefits will not travel with you. Take an ‘Individual’ Health cover for both though it is expensive than a family floater [Reasoning is available here – http://wp.me/p1Y418-1M%5D
    3) Stopping unfruitful currrent/future investments:
    I see you started an ULIP for 20k. Never mix Insurance and Investment – it is like mixing drinking and driving [I own the IPR on this statement, btw :-)]. My recommendation: Discontinue this ULIP. ULIPs if stopped before 3 years are again a waste of money. So take the pains to ensure you contribute 3 annual premiums and stop further contributions. Jeevan Anand and other endowment plans are really another form of mixing investment and insurance – stay away. They make things even worse by investing fully in debt.

    4) Now having discussed wealth preservation lets discuss wealth creation.
    Start at the earliest even before having a kid.
    Tip 1: Maximize PPF investments for both of you each year (1 Lac as on date). Do this diligently and you will see you wealth multiply exponentially. Put this formula =FV(8%,30,-100000,0,1) in Excel. Assuming 8% return over 25 yrs in PPF if you contribute 1 lac each month your corpus in 25 years will be = 1.22 crores in each of your accounts. However around the 21 year mark if you withdraw about 25 lacs for the kid’s education from one of the PPF accounts will have a value of 72 lacs after 30 years and the othe will be 1.22 crores. So you can have a corpus of 1.94 crores in 30 years – meet your kid’s education target + retirement just by doing a no-head-breaking-investment called PPF. Bulk investments in PPF is recommended at the start of year (between Apr 1 and Apr5) but if it takes some time for you folks to get to that habit it is fine. Consider this as an EMI and contribute about Rs. 8,333 each – every month. Monthly contributions will reduce your final corpus but not majorly.

    Term plan, Health insurance etc will eat up about 30k each year for you = ~ 2500 per month. ===. Insurance + PPF = eats us 20k of savings each month. The remaining 30 k can be invested as follows:

    Push the home purchase by 5 years; Assuming you need a down payment of 8 lacs in 5 years invest about 20k in Short term debt funds each month. This will grow at ~ 8% post tax to an amount of ~ 14.76 lacs in 5 years. The reason I am not recommending FDs/RDs is that the interest is taxed at your marginal tax rate which would be 30% making even a 10% FD give a true return of only 7%. The recommended emergency corpus is about 6 months expenses ==. 3 lacs in your case. It may appear inappropriate to combine emergency corpus and home loan downpayment but the criteria for both are same: Accesibility and stability. This will exist as a single scheme but notionally you know they are for 2 purposes. To reduce confusion you and your spouse can each run 1 debt fund – one for emergency, one for home loan down payment.

    That brings us to spending the last 10k. Push these into Equity diversified mutual funds like HDFC Top 200, ICICI Pru focused Blue chip and IDFC Premier equity. Choose no more than 2 schemes. From year 2 when there is a 10% surplus make this 3 schemes and just stop there. Further increase in income can be distributed among those 3 schemes. Assuming you carry on the SIPs come rain or sunshine come bear or bull market the final corpus in 30 years will be a mammoth 8.29 crores.
    Do note several other goals appear to be missing here: There are no goals mentioned for buying a car, perhaps a second home, school education fees, foreign holiday etc. Also I have not taken into account your home loan EMIs etc. which MAY reduce the final corpus considerably but given that the 2 primary goals have been taken care directly by PPF I see no harm in the overall plan.
    A word of caution: The expenses you envisage in 30 years may not be right. Rs. 45000 of expenses today growing at 8% inflation will put the monthly expenses at ~4.5 lacs per month in 30 years and a 1 crore corpus would not take you far even if that corpus keeps growing.
    What I have done is set the ball rolling to make you don the thinking cap. You need to work out some more of these numbers yourself to fine tune for future expenses you may anticipate. Goodluck in your pursuit.

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