Be frugal, positive inlife to generate wealth

MUMBAI: Manjit Kaur's parents came to Mumbai as refugees after Partition, with no wealth and six children to support. The one thing her parents ensured was education for all the children. Kaur, now 53, sees those tough days as a blessing as she learned frugality and how to stay positive. After completing her graduation, she joined a bank as a junior clerk and worked her way up to the level of a joint general manager.Her husband Ishwar Singh (64) is a retired professor. They have a college-going son, Inderpreet (19).
What are they saving for?
The couple wants to purchase a house worth Rs 2.81 crore after five years. They want to spend Rs 1 lakh annually on their son's education. They want to save Rs 20 lakh for their son's marriage. Kaur requires Rs 5 lakh to support her parents. The couple wants to build a corpus of Rs 25.90 lakh for retirement. They also want to buy a luxury car and go on a foreign vacation.
The costs will be revised on the basis of inflation.
Where are they today?
Cash flow: The couple's total monthly inflow from all sources is Rs 2.44 lakh, against a monthly outflow of Rs 1.85 lakh. The outflow consists of routine household expenses, insurance premium, taxes and EMI payments. The EMIs amount to around 26% of the take-home income.
Net worth: The couple's total assets are worth Rs 2.76 crore, which includes cash and near-cash assets worth approximately Rs 80,000. Their personal assets are worth Rs 11 lakh in the form of two cars and jewellery. They have real estate investments worth Rs 2.64 crore. There is an outstanding liability of Rs 46.55 lakh in the form of a loan. The liabilities are about 17% of the assets.
Contingency fund: The mandatory monthly expenses of the family are Rs 1.72 lakh. The balance in bank FDs is Rs 80,000. This is approximately 15 days' reserve.
Health & life insurance: Kaur has a life insurance policy with a sum assured of Rs 12 lakh. She also has health insurance in the form of a family floater policy.
Savings & investments: The couple has direct equity worth Rs 26.52 lakh, equity mutual funds worth Rs 70,000, bonds worth Rs 65,000, and EPF/PPF worth Rs 3.24 lakh. Their other assets, including the real estate investments, amount to Rs 2.33 crore.
Fiscal analysis
The couple's saving rate is reasonable, but their contingency fund is insufficient. Their borrowing is within permissible limits. However, since their retirement is nearing, it is prudent to be debt-free at the earliest to ensure least erosion of retirement corpus. The health insurance needs enhancement. The quantum of real estate in their portfolio is very high, followed by equity. Nearing retirement, the couple should allocate more funds to debt-based instruments.
The way ahead
Contingency fund: The couple should maintain a contingency reserve of Rs 5.2 lakh, out of which Rs 35,000 should be held as cash in hand and the balance in an FD linked to a savings bank account.
Health & life cover: The couple can purchase a health cover of Rs 20 lakh in the form of a floater policy for the entire family. Over a period of time, they can increase the cover to the maximum possible amount.
Planning for financial goals
Home purchase: The couple should liquidate one of their existing real estate investments and purchase the required house.
Son's education: They can use their existing direct equity and equity funds for meeting education expenses.
Son's marriage: The couple can start an SIP of Rs 10,000 in a debt fund and a gold fund to build a corpus for the son's marriage.
Parental responsibility: Kaur can transfer Rs 5 lakh from the direct equity/equity fund assets to a mutual fund scheme that invests about 20% in equities and 80% in debt. This amount can be earmarked for supporting her parents.
Retirement planning: After funding the son's education and taking care of parents, the residual real estate, EPF/PPF and equity assets should be utilized for retirement. Also, once all loans are paid off, the couple can invest an amount equivalent to EMIs as an SIP in a mutual fund scheme that has 35% equity and 75% debt.
Car & foreign travel: The couple can consider this goal after paying off all their loans.
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