REAL FINANCIAL PLANNING CASE ANALYSIS – MS LAVIKA DUTTA

Real Financial Planning

Case Analysis – Ms Lavika Dutta

 

Financial Planner Kartik Jhaveri has this plan ready for a 27-year-old woman. Let’s see what’s up...

 

 

CSA (Current Situation Analysis)

 

Lavika is basking in the glory of the good life. At 27 she believes in living life to the fullest and why not. She earns extremely well and has a luxurious budget for life and lifestyle expenses. From her earnings of 1 lac per month she does not bat an eyelid while spending almost 60% of that on just herself. A dream situation to be in; no responsibilities, no commitments, parties, movies, entertainment, expensive weekend holidays etc. Life is as good as it can be.

 

She too has her share of dreams and financial goals. She is contemplating to buy a weekend home in the hills of Panchgani, regular holidays, a mid-size luxury car and wants to create an enviable range of bridal and fashion wardrobe. This is incidentally the place from where problems and issues arise. To get something; something needs to be sacrificed. Objectives never get achieved without some sort of commitment and the attitude of sacrificing some aspects of today for an even better tomorrow.

 

Like most people of her age she is yet to begin the journey of creating assets for herself.

 

Financial Plan Premises

 

The money required to do any planning comprises of the lumpsum cash plus current investments and monthly surplus. She has zero assets as of now. However from what is visible is that she has a savings potential of about Rs. 40,000 per month given her current lifestyle and a bonus of Rs. 1.2 lacs p.a. A lot needs to be extracted from this money.

 

 

Planning For Goals

 

Contingency planning – General: Suggest to allocate about Rs. 120,000 or so towards this goal. About Rs. 60,000 of this money may be placed in short term fixed deposits so that even the idle money earns a better rate of return than remaining in the savings account. The other 60,000 may stay in a short term bond fund. Normally it is recommended that without having contingency fund planned well one should not considers other financial goals. This funding may come from 2^nd years bonus that she is going to get or from increase in income as it happens. I do not see too much money being available for this right now however the money that she will deploy in other goals can help her should she face any emergency. It is important to know what we need and as long as we are making some investment we can make an exception for her just for now. Plus she is young so there is a need but not a dire urgency.

 

Contingency planning – Healthcare: The other contingency planning area is healthcare. In this regard it is advisable to consider a health insurance of atleast 3 lacs. She may also consider including other members of her family via a family floater plan else individual medical plan will do.

 

Life Insurance – There is no need for considering a life insurance contract at this stage of her life. If however she feels a compelling need to do so then a term plan of about 20-30 lacs should be adequate for now.

 

Buying a vacation home – It is estimated that such a home may be in the range of about 50 lacs. In the next 8 years we may expect the value to be close to about 75-80 lacs. She may start to make an allocation for this by using 20,000 of her monthly surplus for the next 3 years and Rs. 40000 thereafter for the next 5 years. The investment strategy for this goal would be 100% equity allocation via equity mutual funds. Thus she can expect to garner about 44-45 lacs. The balance will need to be funded via a home loans and 8 years later she will most likely be in a position to afford the emi as her income would have increased sufficiently. At this stage we can only make this assumption provided life circumstances do not change drastically.

 

Vehicle funding – An investment of about 20,000 per month for the next 3 years in a recurring deposit or a liquid or an MIP mutual fund should enable her to generate about 8 lacs for her car.   .

 

Retirement funding – Here’s where the issues begin. Even though retirement is a long term goal we can afford to ignore this. As times passes by the asking rate for deployment in this goal keep increasing. Here’s what we propose to do;

 

1. We take retirement at age 50
2. We estimate future lifestyle based on a Rs. 50,000 monthly expense today
3. The equivalent lifestyle expenses then at age 50 is likely to be Rs. 2 lacs per month
4. This must then increase at the rate of say 6% to accommodate for inflation
5. As a result after some calculations we arrive at a figure of Rs. 4.93 crores. That’s the kitty needed at her age of 50 so that above may be managed comfortably.
6. Now in order to get the Rs. 4.93 crores she needs to put away about 25,000 per month for the next 23 years.
7. The strategy to be undertaken is 100% equity allocation for now
8. The strategy assumed post retirement is a conservative one with equity allocation to be about 20-30% and remaining in fixed interest instruments.

 

Fashion Wardrobe – This called for a budget of Rs. 10000 per month plus the annual bonus of 1.2 lacs which will accrue during the course of the year. Store this money into a recurring account of 1 year so that at the end you have lumpsum cash. No risk on this investment strategy.

 

Holidays – This also calls for a monthly budget of 10000 and she may follow the same strategy of investment into RD’s so that she is able to obtain a lumpsum at the end the year.

 

Final Verdict

 

The goals that she has in mind needs a funding of;

 

1. Vacation Home    - Rs. 20,000 now and Rs. 40,000 from year 4 to year 8

2. Vehicle - Rs. 20,000

3. Retirement          - Rs. 25,000

4. Wardrobe            - Rs. 10,000 plus 1.2 lacs annual bonus

5. Holidays               - Rs. 10,000

 

 

That totals to Rs. 85,000 investment budget per month. This also means that she has about 15,000 to spend for herself which is not bad per se however this ultimately it is a matter of individual choice. The financial plan above is a guideline of what she can achieve and how. Whether she wants to achieve her goals or continue with her high profile lifestyle today is a decision Lavika needs to take asap.

 

Disclaimer:

The contents of the above articles are the intellectual property and copyright of the author, Kartik Jhaveri. No part may be used or reproduced in any form or manner. If you choose to act upon the information contained in the above article it is at your own risk. This article is purely educative and you are strongly advised to consult an expert prior to taking any significant decision. The reader must understand that this plan is only a guideline and must consider this case analysis to be a very short synopsis of the comprehensive Financial Plan. This must not be construed as the comprehensive Financial Plan.