Real work starts when you start implementing your financial plan

It was a Tuesday afternoon, around two years ago, when Priya Nath (name changed) met us for the first time. Priya was a thirty four year old single mother of an eight year old daughter, Aditi (name changed). Priya had recently lost her husband. She was working for an MNC and was very worried about her personal finances. Till his death, her husband was handling all the finances and she never paid much heed to it. But now she had to take charge.

Financial Situation

Priya drew a salary of 15 lakh per annum. She had monthly fixed expenses of Rs 25,000, including Aditi’s schooling, and variable expenses of Rs 25,000 – 30,000. She had a balance of about 3.2 lakh in savings account, 3 lakh in bank FDs and paid yearly insurance premium of 2.4 lakh in traditional plans and ULIPs that gave her a total life cover of 20 lakh.

She had a 2 lakh medical cover from her employer but no personal mediclaim. She had about Rs 2 lakh in mutual funds and a personal loan outstanding of Rs 1 lakh on which she paid an EMI of Rs 3,516. With a take home monthly salary of about Rs 86,000, after paying for all her commitments at times she would be left with nothing at the month end.

Financial Goals

Her goals were to provide for Aditi’s basic education and post-graduation studies at the age of 21, for which she would need Rs 6 lakh and 20 lakh respectively. She also planned for annual vacations with Aditi that would cost Rs 1 lakh every year, Aditi’s marriage at 25 costing Rs 10 lakh and her retirement at 58.

The situation was not easy and Priya was losing sleep over how she would cope with the ever increasing costs.

The Solution

For us, the first step was to ensure sufficient security for Priya and Aditi. Priya had a low insurance coverage, so we first made her take an online term plan for Rs 1 crore for 25 years and a personal mediclaim floater of Rs 5 lakh covering herself and her child. After understanding the returns being generated from her various insurance policies  and term left to be serviced, we found it was better for Priya to surrender the policies.

The surrender of policies ensured one-time cash inflow of about Rs 5 lakh and a savings on insurance premium of Rs 20,000 per month.

The 5 lakh was used for part settlement of her personal loan, including a pre-payment charge. The balance of Rs 4 lakh was parked in a fixed deposit as a contingency fund. Once security was taken care of, the next step was to help her invest to accumulate wealth over time for Aditi’s education, marriage, their vacations, etc. According to the risks she could take with her investments, we suggested she invest in specific debt and equity mutual funds in a regular and systematic manner. In addition, she also agreed to increase her monthly savings when her income/savings increased as she progressed in her career.

Growing Confidence

As financial planners, we realize that making a plan is just the start, while the actual work starts during the implementation stage. So our team helps Priya regularly through follow-ups and updates to ensure she is on track with her plans. It has been two years since Priya came to our office completely confused and worried. Today, we see a very confident woman with much higher sense of security, utmost clarity and happiness in her personal finances and increased net worth.

(This article first appeared in The Times of India on 28^th May, 2013)