Sample Financial Plan

Financial Plan for Mr. ABC

Current Details
Mr. ABC is 29 years old. He is married. The couple together is currently drawing a net monthly salary of Rs 80,000. Out of this Mr. ABC sends Rs 15000 every month to his parents. Their current monthly expenses are Rs 22000 (which includes rent of Rs 10,000 a month). So after deducting Rs 37,000 (Rs 15000 for parents + Rs 22000 for expenses and rent) the couple is left with Rs 43,000 per month for their investments and meeting their financial goals.

Current Investments and Insurance
1) Mr ABC has invested in an Endowment Policy which gives him a cover of Rs 10,00,000 since 2006. The half yearly premium for this policy is Rs 6000. The tenure of this policy is 15 years.

2) Mr. ABC has invested in 2 term insurance policies giving him a total sum assured of Rs 56 Lacs (Rs 38 Lacs and Rs 18 Lacs). The annual premium for the 2 policies together is Rs 12000 (Rs 7000 and Rs 5000).

3) Mr. ABC and his wife don’t have any health insurance cover

4) Mr. ABC has taken SIPs of Equity Linked Savings Schemes (ELSS) for tax saving purpose. The monthly investment amount is Rs 3000 (Rs 2000 and Rs 1000).

5) Mr. ABC has liquid cash of Rs 1,08,000 in his Savings Bank Account

6) Mr. ABC has gold jewellery worth Rs 2,00,000.

Financial Goals
Mr. ABC has the following financial goals
1) 3 years from now Mr. ABC wants to buy a house worth Rs 45 lacs. For that he wants to start accumulating the 20% margin money of Rs 10 Lacs from now onwards and fund the remaining amount through a home loan

2) Mr. ABC does not have a kid now. He plans to have a kid 3 years from now. But Mr. ABC wants to start investing for the kid’s education (PG Course) and marriage right now itself. Mr. ABC wants to start building an education fund for the child’s PG Course which will cost Rs 15 lacs at today’s costs.

3)  Mr. ABC want to start building a marriage fund for the child’s marriage which will cost Rs 12 lacs at today’s costs.

4)  Mr. ABC wants to enjoy an annual vacation with family for which he plans to have an annual fund of Rs 50,000

5)  Mr. ABC wants to have a retirement fund of Rs 2 crores when he retires.

Solution
Mr. ABC has been suggested the following Financial Plan to help him meet his Financial Goals

Step 1: Emergency / Contingency Fund
As a first step towards financial planning Mr. ABC is required to build an emergency / contingency fund for any emergencies like job change or job loss or loss of income due to any other reason. The reserve fund should be 3 to 6 times of monthly income. So in case of Mr. ABC this fund should be Rs 2,40,000 (Rs 80,000 X 3) to 4,80,000 (Rs 80,000 X 6). Mr. ABC is advised to have a reserve fund of Rs 3,00,000. He already has cash balance of Rs 1,08,000 in his bank savings account and gold worth Rs 2 Lakhs. He can accumulate the remaining amount and invest this amount in a Flexi Deposit Account (Fixed Deposit cum Savings Account). These bank accounts provide liquidity (customer can withdraw entire money or partial withdrawal anytime) of a savings account and till the time the money is with the bank, they provide high returns of a fixed deposit. Nowadays all banks have a Flexi Deposit product which acts as a Fixed Deposit cum Savings Account. Some of the banks providing this product are:

• IDBI Bank – Sweep-in Savings Account
• Axis Bank – Encash 24
• Union Bank – Union Flexi Deposit
• HDFC Bank – Super Saver Facility
• Bank of India – BOI Savings Plus Scheme
• Oriental Bank of Commerce – Flexi Fixed Deposit Scheme
• State Bank of India – Multi Option Deposit Scheme
• Allahabad Bank – Flexi-Fix Deposit
• Bank of Maharashtra – Mixie Deposit Scheme
• Corporation Bank – Money Flex
• United Bank of India – United Bonanza Savings Scheme

Step 2: Insurance
As a 2^nd step towards financial planning Mr. ABC should ensure that he has adequate life insurance cover for himself and his wife and health insurance for both of them.
Mr. ABC is 29 years old today. He and his wife have a working life span of 31 years ahead of them. In these 31 years if their annual net income of Rs 9,60,000 (Rs 80,000 X 12) goes on increasing by 5% then the total amount that they will earn in these 31 years will be equal to Rs 6,79,30,358 (Rs 6.80 crores approx). Hence Mr. ABC and wife are advised to take Life Insurance cover of atleast Rs 1 crore each.

Term Insurance: Mr. ABC already has term insurance worth Rs 58 Lacs. He can go for an additional term insurance cover of Rs 50,00,000. He can convert the Endowment Policy into a paid up policy. He is also advised to buy a term policy of 1 crore for his spouse.
For a Term Policy of Rs 50 Lacs for 25 years the annual premium for Mr. ABC (29 Years) will be in the range of Rs 5500 to Rs 6500. Some of the plans that Mr. ABC can choose from are

 
* The above premiums have been calculated from the respective company website. In case of the 1^st three plans the premiums are exclusive of service tax whereas in case of Kotak ePreferred Term Plan the website does not specify whether the premium is inclusive or exclusive of service tax.
A term plan of Rs 1 crore for Mr. ABC’s spouse for 25 years will cost Rs 10,000 or so per annum.

Health Insurance
Mr. ABC is advised to go for a Family Floater Plan for a cover of Rs 3,00,000 to start with and in the later stages this cover can be increased to Rs 5,00,000 or more. Mr. ABC can choose from the below 2 plans:

a)      Apollo Munich Easy Health Plan (Standard): For a Family Floater cover of Rs 3,00,000 for 2 adults the premium is Rs 4924 (inclusive of service tax). Maternity benefit is available in ‘Exclusive’ variant and after a waiting period of 4 years. Under the Apollo Munich Easy Health Plan (Exclusive) the premium for Rs 4,00,000 cover is Rs 7280 (inclusive of service tax).

b)     Max Bupa HeartBeat Silver: For a Family Floater cover of Rs 3,00,000 for 2 adults the premium is Rs 7193 (inclusive of service tax).

Both the companies offer life long renewal and also there is no loading in case of claims. The difference is Apollo Munich follows an age slab-wise method of charging premium. So as long as the person is in a particular age slab the premium remains same and when the person moves from one age slab to another age slab the premium increases as per the new age slab. The premiums for all age slabs are put upfront by Apollo Munich on their brochures and on their website in writing. Max Bupa does not follow the age slab method of premium. They increase the premium every year on renewal. But how much will they increase the premium every year on renewal is not specified.

Step 3: Child Education Fund
Mr. ABC plans to have a kid 2 years from now but he plans to start saving for the kid’s education (PG Course) from now itself. If the kid is planned 2 years from now the money for the kid’s PG Course will be required 22 years from now when the kid turns 20 years old. Mr. ABC wants to build a Child Education Fund at today’s costs of Rs 15 lacs. If the course costs Rs 15 lacs today and education costs increase at the rate of 10% every year (inflation) the same course will cost a whopping Rs 1.22 crores (Rs 1,22,10,412) 22 years from now in the year 2032.

If Mr. ABC wants to accumulate Rs 1.22 crores in 22 years (Year 2032) from now he will have to start with an investment of Rs. 83,176 (Rs 6,931 monthly) in the 1^st year from the Year 2011 beginning and go on increasing the annual investment amount by 5% every year (compounded) with the 5% increase in his annual income. The annual return expected is 12%.

Step 4: Child Marriage Fund
Mr. ABC plans to get his child married when he / she turns 23 years old. Mr. ABC plans to start saving and investing for the kid’s marriage from now itself. The marriage is planned in the year 2035. According to Mr. ABC a normal wedding as on today costs Rs. 12 lacs and wants to start investing accordingly. If the marriage costs Rs. 12 lacs as on today and if the marriage costs go on increasing at the rate of 10% (inflation) every year then the same marriage 25 years down the line will cost a staggering Rs. 1.30 crores (Rs 1,30,01,647.13).

If Mr. ABC wants to accumulate Rs 1.30 crores in 25 years (2035) from now he will have to start with an investment of Rs 59690 (Rs 4974 monthly) in the 1^st year from the year 2011 beginning and go on increasing this investment by 5% every year (compounded). The annual return on investment expected is 12%.

Step 5 Others
Here in this section Mr. ABC primarily has to take care of 3 things

• Annual Child School Expenses
• Home Loan Margin Fund
• Annual Vacation Fund

Here is the plan for each of the above 3

a) Annual Child School Expenses: Mr. ABC expects to have a baby 2 years from now in 2013. In 2015 when the baby turns 3 years old it is expected to start going to school in Pre-Nursery. The annual education cost assumed is Rs 50,000 which is expected to go on increasing by 5% every year. Mr. ABC will have to fund this cost every year from his annual salary cash flows.

 
b) Home Loan Margin Fund:
Mr. ABC wants to buy a home valued at Rs 45 Lakhs. For this he will have to make a down payment of 20% margin money which will be around Rs 10 Lacs. From his annual salary cash flow Mr. ABC has to take care of things like his annual living expenses, annual house rent, annual vacation fund, annual insurance premiums (life and health) and at the same time he wants to get started with his investments for child education, child marriage and his retirement. After providing for all the above and the contingency reserve fund; whatever is left Mr. ABC can put in a ‘Home Loan Margin Fund’.

On analysing Mr. ABC cash flows and all his expenses and investments we realise that Mr. ABC will take 5 years to build the ‘Home Loan Margin Fund’ of Rs 10 Lacs. At the end of the 5^th year this fund will have a balance of Rs 10,83,494. Mr. ABC can make the 20% down payment and finance the remaining amount through a home loan. Assuming that Mr. ABC will go for a home loan of 35 lacs @ 10% interest for 20 Years; the EMI will work out to Rs 33,496 which will lead to an annual cash outflow of Rs 4,01,952 which Mr. ABC will be able to fund from his annual salary cash flow.

c) Annual Vacation Fund
Mr. ABC wants to go for a vacation every year with his family for which he wants to set aside Rs 50,000 every year. We have assumed that the vacation cost will go on increasing by 5% every year. Mr. ABC can finance his annual vacation from his annual salary cash flows. His vacation fund over the years will look like this

 
In the year 2016 there is no provision made for a vacation as in this year Mr. ABC will be going in for a home loan and the EMI on that will considerably increase his monthly financial outgo and spending money on a vacation in that year will put lot of pressure on his finances. So Mr. ABC can skip the annual vacation in 2016 and in 2018.

In 2018 also if Mr. ABC chooses to go for a vacation his emergency / contingency fund will fall considerably. So it will be better for Mr. ABC to skip the annual vacation in 2018.

We have not provided for vacation post the age of 60 but if Mr. ABC desires to continue with the annual vacations he can do so as he will have sufficiently cash to continue with annual vacations for the next few years post retirement.

Step 6: Retirement Fund
The current monthly expenses of Mr. ABC are Rs 15000. The annual expenses are Rs 1,80,000. The annual expenses are expected to grow at the rate of 7% (inflation) every year. At this rate by the time Mr. ABC retires 31 years down the line; his annual expenses in the 60^th year (retirement year) will increase to Rs 14,66,120.

Post retirement Mr. ABC is expected to live for another 20 years (life expectancy 80 years). During these 20 years (post retirement) if his annual expenses increase by 5% every year (with expenses at Rs 14.66 lacs in the retirement year) then the present value of Mr. ABC expenses at the beginning of his retirement will be Rs 2,27,34,528 (Rs 2.27 crores). This is the retirement corpus (Rs 2.27 crores) that Mr. ABC needs to sustain his expenses during his retirement years when his annual salary income will stop. During the retirement years Mr. ABC can invest the corpus of Rs 2.27 crore in debt instruments which can give him an annual return of 8%. By the time Mr. ABC turns 80 years old this fund will get exhausted.

To achieve the retirement corpus of Rs 2.27 crores by the age of 60 years, Mr. ABC will have to start with an investment of Rs 48,968 (Rs 4080 monthly) in the 1^st year from the year 2011 beginning and go on increasing this investment by 5% every year (compounded). The annual return on investment expected is 12%.

The below chart gives details of all the investments and expenses of Mr ABC. In short the chart gives a complete snapshot of Mr. ABC’s Financial Planning which we have discussed above in the entire article.

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