MONEY MAKEOVER

Financial planner
Gaurav Mashruwala warns that, these days, job loss is a routine part of life

Trevor Almeida's entire life has been a financial roller coaster ride. During his childhood, his mother was the main bread earner and, while she was an excellent money manager, things were tight. As Trevor grew older and started earning, the situation eased a little. However, his mother went through a prolonged illness which drained them financially. When things became good again, the economic slowdown hit him. Currently he is in between jobs. His wife Joyce is employed. They have a lovely son, Craig, who is five years old.
WHAT ARE THEY SAVING FOR? (1) Their topmost priority is to pay back the home loan of Rs 24 lakh. (2) They need about Rs 5 lakh for their son's education and another Rs 7 lakh for his marriage. (3) Further, they need a corpus which can generate Rs 5 lakh a year during their retirement after 18 years. All this is at today's rate of inflation.
WHERE ARE THEY TODAY?
Cash flow: Until March this year, the Almeidas' joint annual inflow was Rs 26.21 lakh. This has been reduced to about Rs 14 lakh after the break in Trevor's career. They spend about Rs 16.21 lakh annually. This includes large amounts paid towards life insurance, taxes, home loan and routine household expenses. Yearly EMI on home loan is Rs 3.84 lakh.
Statement of net worth: Value of assets is Rs 1.35 crore. This includes assets worth Rs 88 lakh for self consumption. Their outstanding home loan liability is Rs 24 lakh — 17.75% of assets.
Contingency fund: While mandatory monthly expenses total Rs 1 lakh, the balance in savings bank, bank FD and cash at home is Rs 21 lakh — about 20 months' reserve.
Health & life insurance: They have a family floater policy of Rs 6 lakh. Total life cover for Trevor is Rs 22 lakh. Most life insurance policies are ULIPs.
Savings & investments: Value of savings and bank FD is Rs 20.90 lakh. Other investments include, direct equity Rs 23 lakh, equity mutual fund Rs 1.30 lakh, bonds Rs 50,000 and balance in post office schemes Rs 1.31 lakh.
FISCAL ANALYSIS: On termination of one income flow, expenses seem higher than income. Huge outflow towards insurance premium. Borrowing is within permissible limits. Health cover is in the form of a floater and hence not optimal. Life cover is through a ULIP. It takes away lots of family income and yet does not give sufficient cover. Overall, the portfolio is skewed towards equity. Large funds are lying idle.
WAY AHEAD:
Contingency fund: Until Trevor is between jobs, keep aside funds equivalent to six months' mandatory expenses. Once the new assignment begins, reduce the corpus to three months' reserve. Use balance funds to pay off the home loan.
Health insurance: As far as possible, opt for independent health cover. In turbulent times if there are multiple family illnesses, then coverage may not be sufficient. Get Rs 5 lakh cover for each family member. Life insurance: Trevor should have at least Rs 50 lakh worth term plans besides the ULIP policies. The ULIP plans are eating into their annual income without either generating optimum returns or giving sufficient cover, so should in part be terminated.
PLANNING FOR FINANCIAL GOALS: Repay home loan:As discussed, use funds parked in the bank FD to partly pay off the home loan. Once Trevor starts his career again, use the investment in direct equity to pay off the maximum loan amount. Son's education and marriage: These goals are more than a decade away. Firstly focus on repayment of home loan. After that, start systematic investment in (1) index fund (2) gold fund (3) international equity fund.
Retirement: Use those funds (same as in Craig's education and marriage) to create a corpus for retirement.
PLANNER'S EYE
Job loss is a part of life these days. It can be a both financially and emotionally turbulent time for the family. The wise family is one which prepares for bad times during good times. Unfortunately, when the going is good, most of us get complacent and postpone preparations for bad times.
Standard prudence suggests that (1) Have sufficient health insurance. Especially in case of job loss, get cover directly from insurance companies in addition to cover provided by employer (2) If you have outstanding loans, pay them off aggressively. In most cases, families may pay their EMI in time, but invest their excess funds instead of using them to pay off more of the loan. The combustible combination of an outstanding loan, job loss and fall in equity markets, can lead to more emotional and financial anxieties. (3) Lastly, always ensure that a portion of your portfolio is liquid. While real estate can generate good returns, they can create an illiquid portfolio.