Financial Planning for the newly married

Nilesh was an unusual customer to me for financial planning. He wants to get a financial plan ready almost 6 months before his marriage.

Nilesh aged 28 is the true representative of the new generation, who want everything to go as per the planning.

I discussed with him his major financial goals.

1. Getting married in July 2012.(engaged to Sweta , working in an IT firm )
2. Plan to have only 1 child in 2014.
3. Planning to buy a flat worth 60 Lakhs in 2017.
4. Provide 15 Lakhs for the child’s education and 10 Lakhs for marriage in current cost.
5. Go for one vacation every year. He wants to see the entire world before retirement.
6. Wants to retire when he is aged 58 with a monthly income of 35,000 in current cost.

He is having a net salary of 60,000 and Sweta is getting 30,000. They get 10-12% annual salary hike.

He is already having 10 Lakhs in bank account, which he wants to spend for his marriage and honeymoon. His parents have not made any provision for this. He saved this amount from his salary, after closing his educational loan.

We recommended him the following from a Financial Planning point of view.

Life Insurance Planning

He is already having an endowment policy and a ULIP policy, where he paid the premium for the last 4 years. The ULIP is having lot of recurring charges and the endowment policy will offer only retuns in the range of 4-5%!

We advised him to go for a cover of 1 Crore and Sweta for 50 Lakhs. We suggested Aviva I-life policy, which is one of the cost efficient policies now available online. Yearly premium comes to 8000/- for him and 4000/- for Sweta. Buy paying 12000/- per annum, they are getting a combined cover of 1.5 Crore till they are aged 60. This is the most efficient way of planning for life cover.

We recommended him to surrender his existing policies after taking these Term policies.

Health Insurance Planning

Though both of them are covered under their corporate mediclaim, we recommended them to go for a family floater policy of 5 Lakhs after marriage. Apollo Munich offers Easy health policy, which offers Life time renewals with an annual premium of around 7000/-. This policy will be of much use, when there is a job change and especially after retirement.

Child Higher Education Expenses

He wants to provide 15 Lakhs in current cost, when child is aged 17. With 6% inflation, this amount will be 45 Lakhs in 2031. He can plan for this through systematic investments of Rs.5600/- in good mutual funds assuming a 12% annual return.

Child Marriage Expenses

10 lakhs in current cost will be 48Lakhs, in 2039 assuming 6% inflation. He can accumulate this by investing 2300 per month in good mutual funds.

Vacation expenses

At present he is getting around 1Lakh as annual bonus. We recommended him to spend this on annual vacation. He can save this money in a separate account and draw from it as and when they want to go for vacation.

House purchase

We suggested him to save 35,000 per month for the next 5 years in balanced mutual funds to accumulate around 27 Lakhs. He can go for a 20 year housing loan for the balance 33 Lakhs with an EMI of around 34000/- @11%.

By opting for a joint home loan, both of them can claim 1.5 Lakhs as deduction towards home loan interest. This will reduce the effective interest rate.

Retirement Planning

Value of 35,000 after 30 years will be 2Lakhs per month. Assuming longevity of 80 years, the corpus required for this will be around 4 Crores.

Assuming an 8% increase in basic salary every year, and assuming the PF interest rate remains at 8% through out, he will have around 2 Crore in his PF account when he is 58. Sweta will contribute another 1 Crore. So, the shortage for retirement is 1 Crore, which he can manage by investing 3300 per month in good mutual funds. If they receive gratuity, that will be extra.

By adopting an early savings plan, the couple will be reaching all their financial goals easily. Please see the below chart for their savings plan.

After marriage, their combined take home salary is 90,000. They will have around 20,000 as household expense, 10,000 rent and another 12,000 as life style expenses. They can easily save around 46000. This will take care of all their financial goals in life.

The annual increase in salary for both of them can be used for the child’s educational expenses and for improving the quality of life.

All this is possible because of the wise decision of Nilesh in getting a Financial Plan in place early in his life and his readiness to save early. If he delay this by 5 years, things will be difficult and if delay by another 5 years, it is almost impossible. That is the power of compounding in savings. Now he has only 2 things to do with his personal finance.

1. Don’t listen to the sales calls of any agents or brokers.
2. Review the Financial Plan annually and make changes, as suggested.

Once the Financial Plan and is ready, Nilesh & Sweta is now busy, in deciding the honeymoon location.