Personal Finance

Financial Planning - The nuts and bolts for a young person

Deepesh Raghaw | Updated on February 18, 2020 Published on February 18, 2020

Representative image   -  Getty Images/iStockphoto

Adequate life and health insurance, an emergency fund, and equity investments are essential

Ashish started working two years back. He has not saved much in his first two years of professional life and now wants to plan his finances in a more structured manner.

His take-home monthly salary is ₹70,000 and he can save about ₹40,000 on a monthly basis. His EPF contribution is ₹7,900 per month. He wants to save ₹5 lakh for his wedding that he expects to take place in the next three years. He wants to invest the remainder of his savings for the long term. He has no plans to purchase a house right now and will make this decision jointly with his spouse once he gets married.

While he is single and his parents are not dependent on him yet, he expects them to become at least partially financially dependent on him once his father retires in five years. Neither he nor his parents are covered under any private health insurance plan. Currently, Ashish’s employer health insurance plan covers him and his parents for up to ₹5 lakh annually.

Portfolio structuring

Before Ashish structures his investment portfolio, he needs to structure his insurance portfolio.

Even though Ashish has no financial dependents now, it is obvious that his parents will depend on him financially in a few years. Hence, it is important that he purchases a term life insurance cover. At present, given the level of financial support that he may have to provide to his parents, he must purchase a life insurance cover of ₹1 crore. This will cost him ~ ₹9,500 per annum. He must revisit his life insurance requirement at various life events, i.e. marriage, birth of a child, etc. He must also purchase accidental disability coverage for the same amount. He can add this cover as an accidental disability rider to his term plan. This will add about ₹4,000 to the cost of the plan.

He needs to purchase health cover for himself and his parents. He can purchase an individual cover of ₹5 lakh for himself and a family floater cover of ₹7.5 lacs for his parents. Having two policies is likely to be cheaper than a single-family floater that covers all three of them since his parents are close to 60. His cover will cost about ₹8,000 in the first year while the parents’ cover will cost ₹34,000. He must note that these premiums will increase with age.

In addition, he must gradually build an emergency fund. Towards this, he can channel about ₹Rs 5,000 per month in a liquid fund. He need not invest heavily towards this since his father is still working and can pitch in, if required.

After insurance premiums and emergency fund contribution is accounted for, Ashish can invest ₹30,000 on a monthly basis.

For his wedding, he can invest ₹7,200 per month in an ultra-short duration fund.

The remaining amount can be routed towards long-term investments.

After including employer contribution, ~₹15,000 is going towards EPF. This mandatory contribution is already skewing his long-term portfolio towards debt. At the same time, we must note that this EPF corpus is quite illiquid and is difficult to access even during an emergency.

To increase equity exposure, Ashish can put ₹5,000 each per month in a large-cap index fund, an aggressive hybrid fund and a mid-cap fund. The remaining amount (₹7,800) can go to a low duration debt fund.

Ashish can make minor tweaks to optimise his taxes. For instance, to fill the Section 80C limit of ₹1.5 lakh, he can replace some equity exposure with an ELSS fund or replace some portion of low duration fund exposure with PPF. While he can put much more money in PPF, liquidity will be an issue at his level of savings. Once his cashflows improve, he can increase exposure to equities and PPF.

The writer is a SEBI-registered investment advisor at personalfinanceplan.in

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Published on February 18, 2020
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