A recently married young couple, Tarun, aged 29, and Shweta (27), sought personal finance advice to get more clarity on how to manage their finances, going forward.
Tarun worked in a multinational company with an after-tax monthly income of ₹1.1 lakh and Shweta, a healthcare professional, earned ₹70,000 a month after tax. Both their employers were contributing ₹1,800 per month towards EPF, which is the minimum requirement. Husband and wife both did not have any savings or liability commitment then.
After detailed discussions, they arrived at their financial priorities that are listed below:
* They wanted to live on Tarun’s income and were inclined to save the entire income of Shweta
* As both were skilled and capable of getting immediate employment in case of job loss, they were not interested in creating an emergency fund.
* Their parents were financially independent. Financial support could also be provided by them, if needed, for any major goals. Shweta was very keen to build wealth and exhibited aggressive risk profile. Tarun, on the other hand, had a moderate mindset. He wanted to ensure relatively-safer investments, as building wealth was not a high priority with inheritance expected at major milestones in their lives.
Shweta wanted to build a corpus before getting into motherhood and later decide on whether to continue in the same employment or not. She was also keen to have a break for two years when the child is born. They had a plan to have two kids in the next 5-6 years.
* Shweta was also found to be skilled in music. She was in the process of releasing an album along with her friends. Her contribution towards this was around ₹1.5 lakh that was likely to happen in a year’s time frame.
* They did not want to buy a car and were happy with the high-end bike and enjoyed the weekend rides.
* They wanted to plan for two vacations a year costing approximately ₹75,000 a trip.
* Both wanted a comfortable lifestyle without compromising on savings and investments.
After assessing individual risk profiles, it was advised to opt for a balanced risk profile at family level and more equity allocation to Shweta and more fixed income allocation to Tarun.
Redefined their goals and priorities and recommended the following:
* Both were skilled and career growth prospects looked promising. It was agreed that both should not quit employment at the same time. Hence it was agreed to have ₹2.25 lakh as emergency fund, covering three months’ living expenses, including rent.
* Though they were financially independent, assessment of their earning potential suggests opting for ₹2-crore and ₹1.5-crore life covers for Tarun and Shweta, respectively. They were advised to opt for pure term insurance with lump sum benefit.
* Both were covered with ₹3-lakh health cover through employer-provided group insurance. It was suggested to opt for private health cover of ₹5 lakh as family floater along with ₹20 lakh super top-up health insurance considering the family history.
* It was also agreed to opt for accidental insurance for a sum insured of ₹25 lakh with hospitalisation benefits.
* Since both employers were not ready to contribute 12 per cent of Basic towards EPF, they were advised to opt for NPS and PPF for their fixed income investment allocation. This could help them save in safe and tax-efficient fixed income investments with compounding benefits in the long run.
* Since both are likely to continue earning, it was recommended to build wealth independently in their names. This will help them manage personal finance better and segregate their independent finances easily in the long run in a tax-efficient way.
* Monthly expenses of ₹70,000 was arrived at and ₹15,000 per month was allocated towards two trips a year. Vacation fund was advised to be accumulated through flexi-deposit with savings bank account. They were advised to have ₹5,000 per month reserved for buying pure term insurance and other recommended insurance policies.
* After analysing their cash flow, they had the potential to save ₹90,000 a month comfortably without compromising on their lifestyle.
a. ₹20,000 per month was advised to be invested in two PPF accounts and ₹10,000 in NPS per month in two accounts in their respective names.
b. ₹10,000 per month was advised to be saved per month in recurring deposits/liquid funds towards building emergency fund. Once the emergency fund reached the target, the saving was advised to be continued to cater to any short-term needs such as car purchase upfront payment or white goods and electronic gadgets purchase regularly. This would also help them accumulate funds for any requirement at the time of childbirth.
c. ₹15,000 per month, as per Tarun’s request, to be invested in large-cap equity mutual fund. He was also explained on short-term volatility of such an instrument. This investment was mapped to retirement, one of his long-term goals.
d. ₹20,000 per month, on Shweta’s request, earmarked to build a decent corpus in the next two-three years along with additional contribution from bonus accumulation during the year. She preferred to invest this amount in large and mid-cap mutual fund.
e. ₹10,000 per month, as requested by Shweta, to be invested towards long-term wealth creation in an aggressive mid and small cap mutual fund.
9. All the investments suggested were flexible without any commitment, with the possibility of Shweta opting for a break in the near term.
A different mindset
The mindset of young couples varies in many aspects from that of an earlier generation. I believe there is not much detailed discussion happening within the families, especially with elders, on financial planning. This could be due to many reasons: nuclear family structure, availability of a wide variety of savings instruments that were not in existence a few decades ago, unable to prioritise personal finance during family discussions, to name a few. In this case, the mismatch in risk profile and a deep understanding of goals of the couple, were addressed by a third-party professional. This further enabled them to understand suitability of various products available in the market to their own needs and goals. The new-age challenge, ‘Paradox of Choice’, is definitely a concern in the modern world and this couple was happy to have addressed that challenge too in the process of their financial planning.
The writer, Co-founder of Chamomile Investment Consultants in Chennai, is an investment advisor registered with SEBI
June 04, 2022