Always link your investments to financial goals

Tag your saving plans to a particular, concrete target, advises financial planner Gaurav Mashruwala

    Rajan Dass (27) has led a simple life. His family did not have enough money to splurge but could take care of routine expenses. His family comprises his parents, two sisters and himself. Father is retired army officer who now works in the private sector. Mother is a home maker. "There weren't great savings and hence upon my father's retirement, we faced a slightly difficult time but things have stabilized now," says Rajan. He too works in the private sector and lives with his family in Chennai. 
WHAT IS HE SAVING FOR? (1) His most important goal is to get his sisters married. He needs Rs 3 lakh for each of their marriages in the next two to three years. (2) Buying a home is the next priority for which Rs 12 lakh is required in one year. (3) For his own marriage after about four years, Rs 4 lakh will be needed. Later, when he has his own family, he will need a corpus to fund his children's expenses. He also aspires to an early retirement. He will keep reviewing these expenses and adjust them to inflation. 
WHERE IS HE TODAY? 
Cash Flow: Gross yearly inflow from all sources is Rs 2.64 lakh. Against this, the outflow is Rs 1.88 lakh. Outflow includes regular savings, routine expenses, insurance premium and rent. More than 9% of the outflow is being utilized towards paying rent. 
Net Worth: Value of total assets is Rs 50,000. Assets include Rs 20,000 in a savings bank account and Rs 30,000 worth of jewellery. There is no outstanding liability. 
Contingency Fund: Against his own monthly mandatory expenses of Rs 5,600, the balance in the savings account is Rs 20,000. This is about 3.57 month's reserve. 
Health and Life Insurance: 
There is no health insurance. Total life insurance cover is Rs 1 lakh, which is in the form of a money-back policy. 
Loan: There is no outstanding loan at present. 
Savings and Investments: 
Balance in the savings bank account is Rs 20,000. Apart from this, there is no other saving or investment. 
Fiscal Analysis: Spending is within means, although it is slightly on the higher side. Splurging on gadgets and white goods is causing obstacles in wealth creation. A contingency fund is sufficient. There is no health insurance cover. The life insurance cover is insufficient and it is in the form of an investment-oriented policy. Funds are lying idle in a saving bank account. 
WAY AHEAD 
Contingency Fund: Maintain a contingency fund of Rs 5,000 in the form of cash at home. Keep an additional Rs 10,000 in the savings bank account. 
Health and Life Insurance: 
Purchase a health insurance cover for self worth Rs 3 lakh. Also, all those members of the family who do not have a sufficient health insurance cover should obtain one. Since there are certain future goals such as home buying and sisters' marriages, get a life insurance policy in the form of a term plan worth Rs 25 lakh. 
PLANNING FOR 
FINANCIAL GOALS 
Recommendation for each goal is in the order of priority given by Rajan. 
Sisters' Marriages: Since the goal is three years from now, the amount should be invested in a recurring deposit. Start a recurring deposit of Rs 5,000 every month. Increase the amount by 10% every year. Rajan is in the lower tax bracket, therefore a recurring deposit works out to be a better option compared to a debt-based mutual fund where returns are not assured. 
Home Buying: Out of a total cost of Rs 12 lakh, Rajan will have to arrange for Rs 6 lakh. Opt for a loan of Rs 5 lakh to Rs 6 lakh with a tenure of 15 years, but try and pre-pay within a decade. Also, if there is no major compulsion to purchase a home right now, differ buying by five years as there would be several marriage-related expense in the period. 
Own marriage: Any bonus and incentive received should be parked in a fixed deposit for his own marriage. 
Retirement: Rajan wants to have an early retirement at 42. Since retirement is 15 years away, investments should be made in equity-oriented mutual funds and gold so that the corpus can grow. However, it is recommended that retirement be delayed by a few years to achieve the desired retirement corpus. Also, investment in PPF is recommended. 
PLANNER'S EYE 
    Always try and link investments to financial goals and name them. For example, a recurring deposit to fund a sister's marriage, a fixed deposit for your own marriage and a PPF account for early retirement. All those who adopt this technique end up achieving the desired corpus faster. This happens because there is focus. Imagine there is a latest mobile handset in market. Now, if you have surplus in bank, chances are you will splurge. However, if you have a fund called 'daughter's marriage fund', unless there is a real need to change your handset, you would deploy money in your daughter's marriage fund. Another related behaviour is that over a period of time, focus and discipline, saving will increase your corpus in that investment. This will give you encouragement to invest more and a mental peace of moving towards target.