Bengaluru-based Mr Vivek Dhawan is employed as a manager with a leading IT company. The 32-year-old techie lives with his parents and has recently married. His wife is a homemaker. Mr Dhawan has been working with the same firm after he completed his MBA almost 8 years back, and is looking forward to an overseas posting for a few months. The couple is planning their first child sometime in 2012.

Financial goals
Mr Dhawan has recently purchased a property and has an outstanding home loan of Rs 48 lakh. Apart from these, he also has an outstanding car loan and dues adding up to Rs 3 lakh on his credit card. He would like to settle these debts as soon as possible. Apart from these, he also needs to save for the education and the marriage of his child. Mr Dhawan needs to plan for his retirement as well.

Where is he now?

Mr Dhawan has an annual income of Rs 9 lakh, after taxes. Apart from these, he also gets a monthly rental of Rs 20,000 from the house he has recently purchased. He is able to rent it out as he stays with his parents. Living with parents also results in large savings in household expenses, which are low at Rs 10,000 per month.
However, he has large outgoings for the home loan and the car loan.
He has been paying only the minimum balance required every month on his credit card dues. Also, in spite of the allowance for foreign posting, he expects household expenses to go up when he moves abroad.
On the savings side, he has an insurance policy with a life cover of Rs 5 lakh for which he pays an annual premium of Rs 40,000. He has savings of Rs 5 lakh in the bank — Mr Dhawan and his wife are planning to purchase some high end consumer durables. Apart from these, he is able to save about Rs 30,000 every month.

Recommendations

The first thing Mr Dhawan needs to do is to repay the Rs 3 lakh he owes on his credit cards from the money he has saved. He is paying an interest of nearly 30 per cent on this money. This will help improve cash flows and will keep his future safe from ballooning deficits. He can postpone the purchases that he is planning — television, refrigerator — till he is back from his foreign visit. Buying these items on credit and then not serving the debt — during his overseas posting — will push this debt out of control.
Secondly, his insurance cover is clearly inadequate. Mr Dhawan needs to take a term insurance of Rs 50 lakh — enough to cover the outstanding home loan in case of any eventuality. A critical illness cover of Rs 10 lakh for himself and his family is also advisable.
Apart from these, he should maintain a balance of Rs 3 lakh or so in the bank — which should be enough to take care of expenses and most emergencies.
On the investment side, Mr Dhawan can put Rs 70,000 annually in PPF at 8 per cent. This will reduce his tax liability. The lion’s share of his monthly cash savings — about Rs 25,000 — can be invested in diversified mutual funds with a good track record. The remainder can be put in a gold ETF.
Apart from investment, this would also come in useful for their child’s marriage.

(L. Ravindran, PhD, is a financial advisor and managing director of Wealthmax Enterprises Management Private Limited.)