How to save for your goals

Certified financial planner and wealth advisor Gaurav Mashruwala comments and advises Anita on her finances.

In a majority of Indian families, money is never discussed with children.

Fortunately, in Anita's case, a savings habit was inculcated at an early age. Today, she is financially independent and has smartly invested in a home.

Cash flow

Her monthly take-home is Rs 32,000.

She spends Rs 22,000 every month, inclusive of her EMI payment and monthly expenses.

About 37% of her take-home pay is directed towards EMI payment.

This leaves surplus of Rs 10,000 every month, which is about 41% of the take-home pay.

In addition to her annual earnings of Rs 3,84,000 per annum (Rs 32,000 every month), she earns an annual bonus of about Rs 65,000.

Net Worth

House = Rs 16,00,000
Savings account = Rs 72,000
Total assets = Rs 16,72,000
Outstanding home loan = Rs 14,00,000
Liability to asset ratio (loans to asset ratio) = 84%.

Home loan

Her EMI to take-home salary ratio is well within limits. However, outstanding loan (liability) to total assets ratio is adverse. Usually it is recommended to have an outstanding loan to the extent of 50% of total assets. Or example, if total assets are Rs 16,72,000, then the outstanding loan should not be more than Rs 8,36,000.

She may not feel the pinch now as she is able to manage her EMI well. However, in case there is any kind of job loss or other catastrophe which can lead to temporary or permanent loss of income, she will find it difficult to service the loan.

Also, the house is an illiquid asset and hence in the event of need, it is not possible to partly dispose it off.

Health Insurance

The employer provides her with health insurance. She must ensure she reads the plan in detail to understand it carefully.

Life Insurance

She does not have a life insurance cover. She should opt for a 'term' plan for at least Rs 14,00,000 to cover the home loan.

Contingency Fund

She has funds equivalent to about three months in her savings account. She can reduce this to about Rs 65,000. This will be equivalent to three month's expenses.

Goals

Anita must delay her financial goals for home decor and the foreign trip.

Her focus must be on utilising surplus funds to pre-the pay home loan. This should be done even if it attracts penalty. The aim is to bring down the outstanding principal to 50% of total assets.

Once the outstanding principal is brought down, start a Systematic Investment Plan in a diversified equity fund. This will be for retirement. A SIP means she will need to put in fixed amounts every single month into a mutual fund.

She must also start a Public Provident Fund account.

If she wants the same level of income (assuming annual increment of 7.5%) at her retirement age of 60, then she will need a corpus of Rs 9.50 crore. To achieve this, she should save Rs 15,000 every month.

Please note that if her current annual income (Rs 3,84,000 + Rs 65,000) keeps growing at 7.5% every year, then it will be Rs 56,43,000 at retirement.

I would like to conclude that if she has already created her first asset (home), it is important that she makes a WILL bequeathing her asset as per her wish.