Create a financial war chest

MONEY-MAKEOVER

Financial planner Gaurav Mashruwala says that the first investment should be one that protects you from any health or life contingencies

    Under any circumstances, don't develop bad habits." This is what Sagar's parents drilled into him throughout his childhood. Not only is it bad for character, but it is also bad for health and wealth. Sagar Naik (28) thanks his parents for being so forceful about this. His father is a teacher in a government school and his mother is a nurse. His only sister is married and lives in London.
Sagar, his wife Shamla, and his parents live in Mulund, Mumbai. This place was bought after Sagar got his job. The family has steadily progressed from a one-room kitchen house to a one-bedroom hall kitchen and now to a two-bedroom house. While he is a manager in private airline, Shamla works in the private sector. They are expecting their first child early next year.
    There will be a
change in the family income composition soon. With the arrival of the baby Shamala will remain home. Also Sagar's father is retiring in the next few months. The arrival of child will increase expenses. Managing the transition in family income and family size is the focus of this plan.
WHAT ARE THEY SAVING FOR?
(1) The arrival of a baby brings in thoughts of education and marriage. For both these responsibilities, the couple wants to start saving now --They want Rs 8 lakhs for higher education and Rs 4 lakhs for marriage after 18 and 25 years. (2) Further, they want to set aside Rs 3 lakhs to meet their parents' health eventualities. (3) For their retirement, they want a corpus of Rs 1 crore. All these are at today's rate of inflation. They also want a car of about Rs 3 lakhs and dream of foreign travel.
WHERE ARE THEY TODAY?
Cash flow: Total yearly inflow of the couple is Rs 9.46 lakhs. Against this, the outflow is Rs 7.62 lakhs, going towards mandatory savings routine expenses, insurance premium, taxes and EMI for home and personal loan. About 26% of the income is being used to service loans.
Statement of net worth: Total assets are worth Rs 44.84 lakhs. Of this, assets worth Rs 41 lakhs are in the form of house and jewelry. Total outstanding home loan is Rs 17 lakhs and personal loan about Rs 83,000. Liabilities constitute about 40% of assets.
Contingency fund: Mandatory monthly expenses are about Rs 50,000. Against this, the balance in savings bank and cash at home is Rs 68,000. Health & life insurance: There is Rs 1.50 lakhs health cover provided by the employer for the entire family. Life insurance cover in the form of a term plan is Rs 15 lakhs for Sagar. Shamala has money back policy of Rs 1.00 lakhs.
Savings & investments: Value of investments is Rs 3.84 lakhs. This includes savings bank balance of Rs 60,000, cash at home Rs 8,000, equity mutual fund Rs 1.27 lakhs, EPF/PPF Rs 1.35 lakhs and investment in post office schemes Rs 54,000. About 33% of the overall portfolio is in equity, the rest in debt.
FISCAL ANALYSIS: Decent income. The family is low on contingency funds, health insurance and life insurance. Borrowing is within permissible limits. Debt to equity ratio is reasonable. Overall, the family is ill prepared for the transition.
WAY AHEAD:
Contingency fund: Preferably, keep about four months' reserve for contingencies, ie Rs 2 lakhs, keeping in mind the baby. This seems a little difficult right now. However, from now on, for a few months, divert some regular savings towards creating this corpus.
Health & life insurance: Opt for health cover worth Rs 5 lakhs for each member of the family. Do not go for a family floater, as the family can afford dedicated policies.
Life insurance cover for Sagar should be increased to Rs 50 lakhs through term plans.
Planning for Financial Goals:
    Firstly, focus on creating the contingency reserve and purchase of health and life insurance. Child's education & marriage: Invest systematically in an index fund and an international fund. Parental responsibility: Consider balance in EPF for parents and build it up steadily Retirement: Continue systematic plans used for child's education and marriage further to create corpus for retirement.
PLANNER'S EYE
The contingency fund, health and life insurance are like the war chest against financial eventualities. Contingency fund helps withstanding situations where no formal insurance is available --like job loss, catastrophe etc. Health insurance helps us meet expenses due to illness, hospitalization, etc. Life insurance takes care of the financial loss created due to the death of an earning member.
    In the absence of these three, the family gets exposed to financial vagaries of life. The absence of this war chest would mean that the family will erode its wealth and/or get into debt.
    When any one asks me what should be their first investment, my standard answer without blinking an eye is, create contingency and ensure proper health and life insurance.