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MONEY MAKEOVER

Education is the wisest investment

The poorest man can leave his children the biggest wealth, finds financial planner
Gaurav Mashruwala

Tushar Shirsat’s father, Nandkumar, works for the Indian Security Press in Nashik and has a modest salary. But that hardly deterred him from ensuring that his children got a good education. They lived a frugal and simple lifestyle—for example, he cycled 15 km to work every day. It was not easy. Tushar’s initial engineering fees of Rs 35,000 had to be jointly funded by his father’s and sister’s salaries. At the time, his father’s monthly salary was only Rs 12,000. Tushar had to leave his engineering studies at Loni and complete his degree in Nashik, because the cost of living away was too much.
But years of struggle have paid back and the Shirsats’ future looks bright. Tushar, now 27 years old, works with a large corporate, his younger brother Pankaj is pursuing an MBA, and their sister Smita is married. “While my father’s colleagues’ children are driving auto rickshaws or running small shops, I have a stable career and bright future,” says Tushar. He is grateful to his father and his mother Mangala, who always ensured that the house ran smoothly.
The family stays in a flat close to the Press, but they have bought a plot of land and would like to construct a house.
What is he saving for?
Cost of house, Rs 15 lakhs (2) Another Rs 15 lakhs to be set aside for the parents (3) Retirement corpus, which will generate an inflow of Rs 2 lakhs per annum after 30 years. Also, once he has his own family Tushar would like to have Rs 50,000 for his children’s initial education and Rs 5 lakhs for their marriage.
He dreams of a car worth Rs 5.5 lakhs and foreign vacation worth Rs 1.20 lakhs. Tushar also wants to pursue gliding and the cost of a gliding course is Rs 45,000. All the above costs are at today’s rate of inflation.
Where is he today?
Cash flow: Total inflow from all sources is Rs 4.95 lakhs per year. Against this, his outflows are Rs 2.47 lakhs, which includes mandatory savings of Rs 1 lakh, insurance premium, tax and other expenses. Any surplus left is given away to his father.
Net worth: Total assets are worth Rs 3.98 lakhs. There are no liabilities. Assets worth Rs 58,000 are for self consumption. This includes a motorbike.
Contingency reserve: Funds equivalents to about nine months’ expenses are lying idle.
Health and life insurance: Tushar’s employer has covered him for his health expenses. His life insurance cover is worth Rs 3.50 lakhs. This is through investment-oriented policies.
Savings and investments: Funds lying in cash/liquid assets is about Rs 1.93 lakhs (Rs 55,000 in the bank, an FD of Rs 15,000, liquid fund and cash Rs 1.23 lakhs.) Invested assets include stocks/shares worth Rs 45,000, equity mutual fund Rs 34,000, and balance in EPF Rs 68,000.
Fiscal report
There is decent income stream. There is lot of surplus left after expenses. However, funds are not being properly invested. Contingency funds are very high. Health expenses are covered by employer. Life insurance is low. Saving and investments are not aligned to financial goals. Investment to get Sec 80-C benefit in income-tax is ad hoc.
The way ahead
Contingency plan: Keep only Rs 60,000 for contingencies. Keep Rs 10,000 cash at home and the balance in a savings bank linked to a fixed deposit.
Insurance: Read up the employer’s health policy/benefits properly. Increase life cover through a term plan to Rs 35 lakhs. Split into two separate policies. Currently, Tushar’s father should be the beneficiary in both policies, but on getting married he should make wife the beneficiary in at least one policy—which should also be endorsed under the Married Women’s Property Act.
Planning for financial goals
House: Firstly, park excess funds in bond funds. Also start a systematic monthly investment plan of Rs 10,000 in an index fund. At the time of purchase/construction of the house, liquidate both and use proceeds for down payment. For balance amount, go for loan.
Parental fund/retirement:
Tushar will have to prioritize between creating funds for parents and his retirement. Once home requirements are settled, set aside Rs 20,000 in an equity-based mutual fund every month. Also ensure that EPF/PPF contributions are made to the fullest. This will ensure that retirement portfolio has the right mix of debt and equity.
Children’s education and marriage: This goal can be achieved from the yearly income. Any bonus/incentive received in the next five-seven years should be deployed in equity and gold funds, which will help at the time of marriage.
Tax: Investment for the 80-C benefit is erratic. Firstly max out provident funds. Premiums paid towards term plan is entitled for tax deduction. If there is still scope for 80-C benefit left, invest in an equity-linked savings scheme.
(If you wish to be featured in this column, email: moneymakeover@ indiatimes.com)

THE PLAN: Tushar Shrisat is prudent in his spending habits. Now he needs to be prudent in investing his savings to build wealth