MONEYMAKEOVER Build a contingency fund, get more insurance to cover risks

Borrowers with comfortable cash flows should aim to become debt-free at the earliest, advises Gaurav Mashruwala     Few parents allow children to take their own decisions. And of those who do allow, very few of them ensure that the children face the consequences of their decisions. Invariably, if a child makes a wrong move, the parents make good the loss. When such children grow up, they may fear taking decisions because they may not have faced the consequences of making wrong decisions in their childhood.      Nitin Gupta's (35) father, however, allowed him and his siblings to take decisions and face the consequences. It is because of this upbringing perhaps that Nitin stands on his feet today. His father — a banker and a meticulous finance planner — had inculcated a habit of setting priorities. While the family's financial situation was comfortable, children in the Gupta family had to justify their demands. In addition to his father, Nitin also gives credit to his wife Preeti (34) for his progress in life and career as she sacrificed her own career for the sake of the family. The couple has a six-year-old daughter, Akhadha.  What is the couple saving for  •For their daughter's education, the couple needs about Rs 2 lakh every year for the next 12 years  • For her marriage, they would like to spend Rs 20 lakh  • They also want to create an investment pool that can generate regular income for their daughter at a later stage in life  • Finally, they aspire to a foreign vacation at a later date.      All these costs would be revised based on inflation.  Where are they today  Cash flows: Gross inflow of the family per year from all sources is Rs 23 lakh. Against this, annual outflow is Rs 19.45 lakh. This includes mandatory expenses, taxes, insurance premium, regular savings and EMI for home loan. The EMI consumes about 36% of their inflow.  Networth: The total value of all the assets is Rs 1.26 crore. This includes assets for personal consumption — like house, car, jewellery, etc — worth Rs 1.07 crore. The couple's outstanding home loan is Rs 65 lakh, which is about 51% of the assets.  Contingency fund: With a monthly mandatory expense of Rs 1.30 lakh (including EMI), the family has Rs 6 lakh as balance in cash/near-cash assets. This translates into about 4.5 months' reserve.  Health & life insurance: Total health cover by employer is Rs 5 lakh and total life cover is Rs 1.42 crore.  Savings & investments: Apart from the assets for personal consumption, the family has Rs 1.50 lakh in savings account, a bank FD of Rs 2 lakh, Rs 1.50 lakh as liquid fund, Rs 1 lakh in cash, equity mutual funds worth Rs 4.50 lakh and Rs 8 lakh in EPF/PPF.  Fiscal analysis: There are excess funds lying idle in cash/near-cash assets. Health insurance needs enhancement. Life cover is sufficient. Borrowing is slightly on the higher side. Over a period of time, it is important that the couple creates more liquid assets. Currently, liquid assets are insufficient because they have purchased a house and have a loan.  The way ahead  Contingency fund: Keep aside Rs 4 lakh for contingencies. Out of this, keep Rs 25,000 in the form of cash at home and the rest in a savings bank account linked to a fixed deposit.  Health&lifecover:Nitin and Preeti should ensure their total health cover is Rs 5 lakh each and that of Akhadha is Rs 3 lakh. Life cover is sufficient. However, a life cover of about Rs 65 lakh will cease on full repayment of the home loan. Ideally, Nitin should obtain additional cover to ensure the sum assured on his life is approximately Rs 1.50 crore even after the home loan is fully repaid.  Borrowing: Due to a decent inflow, the couple is able to service their EMI comfortably. However, if there is any eventuality with regard to their inflows, they will struggle as their liability is more than 50% of their assets. It is recommended that they aggressively pay off the home loan.  Planning for financial goals  Daughter's education: At present, the couple will be able to fund education requirements from their earnings. However, as a precaution, they should start investing Rs 15,000 every month in a mutual fund scheme that has 15% investment in equity and the rest in debt for about a year. The corpus so created should be earmarked for education and utilized only if there is turbulence in regular income.  Daughter's marriage: A systematic investment of Rs 10,000 every month into a large-cap equity fund is advised. Also, another SIP should be started in a gold fund for Rs 2,500. The amount should be increased by 15% every year.  Corpus to support daughter:  Apart from investing for education and marriage, the couple should start setting aside Rs 5,000 in a mid- to small-cap equity fund every month. The corpus so created can be utilized to support the daughter, if the need arises.  Retirement: While the couple has not stated the creation of a retirement fund as their goal, it is recommended that they start keeping aside some amount for their old age. They can invest in an equity fund as well as a gold fund the maximum possible amount after providing for the goals mentioned earlier to create a retirement corpus. This should be given priority over a foreign vacation.  PLANNER'S EYE      Most young couples who acquire a house earlier in life end up with excessive borrowings and an illiquid asset composition. While this is understandable, it is important that they reduce their liability at the earliest by aggressively paying off the loan. Nitin and Preeti are living within their means — they are aware of their financial goals. With a little more focus on finances, they should aim to be loan free in the next seven-nine years. Nitin Gupta with wife Preeti and daughter Akhadha