MONEYMAKEOVER Use surplus funds to repay your debt

Planning, saving regularly are key to living financially healthy life, says Gaurav Mashruwala

    Manoj Walambe, 31, is an engineer and lives in Pune with his wife Rasika. His father is a government employee and will retire in four years while his mother is a housewife. Childhood was humble — basic needs were taken care of but there were no luxuries. His father used to plan the family budget and save regularly, a habit which ensured that all financial responsibilities were taken care of.
What is the couple saving for?
Once they have children, the couple would require Rs 5 lakh for each child's education and Rs 3 lakh for each child's marriage. For retirement, the couple wants a corpus which would generate an income of Rs 2.40 lakh annually 25 years from now. Apart from these goals, they are planning a foreign trip in the next five years. The costs will be revised based on inflation.
Where are they today?
Cash flow: The family's approximate annual gross inflow from all sources is Rs 6.26 lakh against an annual outflow of Rs 3.98 lakh. This includes routine family expenses, EMI on loan, vacation, insurance premium and regular savings.
Net worth: The Walambes' total assets are valued at Rs 52.54 lakh. This includes invested and liquid assets worth Rs 4.04 lakh. Assets held for personal consumption — house, car and jewellery — are worth Rs 48.50 lakh. The outstanding home loan amounts to Rs 7.82 lakh, which is about 15% of the total assets. Contingency fund: Against the mandatory monthly expenses of Rs 21,500, the balance in savings bank, cash at home and liquid fund together comes to Rs 95,000, which is approximately four months' reserve.
Health & life insurance: Manoj's employer provides a health cover of Rs 2 lakh each to him and his wife. Manoj also has life insurance worth Rs 50 lakh in the form of a term plan.
Savings & investment: The couple's savings account balance and liquid funds amount to Rs 95,000. They have investments in equity mutual funds and gold mutual funds worth approximately Rs 1.12 lakh and Rs 7,000, respectively. Their EPF and PPF balance is Rs 1.89 lakh.
Fiscal analysis: The family is saving approximately 58% of their total inflow. Annual debt payments comprise about 18% of their income after tax. Out of total assets, only about 7% is held from investment perspective while the rest is for self-consumption. This is typically the case with couples in early part of their careers. Over a period of time, savings are diverted towards productive investments and ratio of invested assets in comparison to personal assets improves significantly. Health and life insurance is inadequate.
The way ahead
Contingency fund:
They should maintain a contingency reserve of Rs 60,000, of which Rs 15,000 should be held as cash in hand and the balance in FD linked to a savings bank account. As and when the EMI reduces, they should accordingly cut the contingency reserve.
Health & life cover:
The couple should increase the health cover by Rs 5 lakh each. Manoj should buy an additional life insurance term plan worth Rs 50 lakh
Planning for financial goals
Repayment of housing loan: They should use the excess funds lying in liquid assets over and above the contingency fund to pay the loan, besides voluntarily increasing the EMI contribution by Rs 10,000. Also, all bonus and increments should be used to pay back the loan and become debt-free in the next three-four years.
Children's education and marriage:
Once the home loan is paid off, the family should start investing Rs 4,000 and Rs 1,000 systematically in equity mutual funds and gold mutual funds, respectively, for their children's education and marriage and increase the amount by
    15% every year.
Retirement: The couple should start an SIP of Rs 10,000 in an equity mutual fund to meet their retirement needs and enhance the amount by 10% per annum.
Planner's eye
R arely couples do who we come are across methodical about their finances. Planning family budget, saving regularly and clearly defining financial goals are ingredients to living a financially healthy life.

Manoj with his wife Rasika