Stay liquid, stay mobile

Don't park all your money in illiquid, immovable assets; build a contingency fund; pick up an optimum cover. Financial planner Gaurav Mashruwala has these suggestions for two city couples

    Mr and Mrs Prashanth live in Mumbai. Prashanth, an MBA (finance), works for the financial services industry. His wife is an engineer and works in the private sector. 
Cash Flow: The couple's gross yearly income is Rs 15.03 lakh. Their yearly outflow is Rs 8.04 lakh. This includes routine expenses and those incurred to support dependent parents, life and medical insurance premiums, EMI on the home loan and taxes. About 26% of their income is being utilized to service home loans. Net Worth: Total assets are worth Rs 95.04 lakh. This includes a house worth Rs 85 lakh. The outstanding home loan is Rs 33.50 lakh. Liability is about 35% of the assets. 
Health & Life Insurance: 
Health cover for himself and his spouse is Rs 4 lakh. In addition, there is another health insurance cover of Rs 2.50 lakh for his wife. His personal life cover through a term plan is Rs 25 lakh. In addition, a life cover of Rs 15 lakh has been provided by his employers. 
Savings & Investments: The balance in his savings bank account is Rs 41,000, his bank fixed deposit is Rs 30,000, direct equity Rs 2.64 lakh, equity mutual fund Rs 3.04 lakh, debt mutual fund Rs 50,000, EPF and PPF Rs 2.65 lakh and the balance in corporate FD Rs 50,000. 
QUERY: How much should the couple keep aside for contingencies? Is theirinsurance cover sufficient? They want to purchase a car worth Rs 4 lakh in the next few months. How should they fund it? 
FISCAL ANALYSIS: Their inflow is substantially higher than the outflow. This is a big positive. Borrowing is within permissible limits. Both health and life insurance covers are insufficient. Out of overall assets worth Rs 95.04 lakh, the cost of their house is Rs 85 lakh. Assets are skewed in favour of asingle illiquid, self-consumption asset. This is usual as most younger couples would purchase a house as their first asset. However, they should now concentrate on paying back their loan and create more liquid assets. 
WAY AHEAD Contingency Fund: 
Monthly mandatory expenses are in the range of Rs 67,000. Against this, their balance in the savings bank and sweep-in bank fixed deposit combine is Rs 71,000. This is about one month's reserve. It should be enhanced to about Rs 2 lakh; Rs 25,000 should be kept as cash at home and the rest in their savings bank account linked to a sweep-in FD. Health & Life Insurance: Ensure a health cover for self and spouse is Rs 5 lakh each. This could be either purchased directly from an insurance company or provided by the employer. Prashanth should have a life cover of Rs 1 crore for himself in the form of a term plan. 
Car Purchase: The couple is able to save about Rs 7 lakh every year. They only want a car worth Rs 4 lakh. Therefore, in the next 12 months, they should start a SIP of Rs 35,000 in a debt-fund to create the corpus. 
    Mumbai-based Sarath Babu works for a private company while his wife is a housewife. 
Cash Flow: Babu's total monthly income from his salary and rent is Rs 1.12 lakh. Against this, the couple's mandatory outflow is Rs 1.04 lakh. This includes routine household expenses, insurance premium, EMI on home loan, taxes and so on. About 52% of their income is being utilized to pay the EMI. They have two home loans. The EMI on the first is Rs 28,000 and on second one, Rs 30,000. 
Net Worth: They own 'self-consumption' assets in the form of jewellery, a car and real estate. Besides this, they only have an EPF/PPF worth Rs 5 lakh. They do not have any other bank savings. 
Health & Life Insurance: Combined medical insurance for himself, his wife and parents is Rs 3 lakh. The sum assured for the life cover of Sarath Babu is Rs 6 lakh and his wife is Rs 5 lakh. Both these are investment-oriented policies. 
QUERY: How should they get out of home loan debt at the earliest? Both the loans have a 10-year tenure. The first loan is two years into its term. The second loan was taken recently. FISCAL ANALYSIS: The couple's finances are cash-flow positive; they spend less than their earnings. There is absolutely no liquid money for contingencies, though. Their healthinsurance is insufficient and so is the life insurance. Their entire investment portfolio is illiquid. Borrowings are on the higher side. The situation is tougher considering it is a single-income family and has no other assets that can be liquidated to pay back the principal in case of eventualities. 
WAY AHEAD 
Other precautions: Even before repaying the loan, they should: 
    Keep aside funds equivalent to one month's mandatory reserve plus another two months' EMI for contingencies. 
    Enhance health cover for the family to Rs 10 lakh. 
    Cover themselves through a term plan to the extent of their outstanding home loan. 
Recommendations: For the time being, they must continue paying the existing EMI. Any increments, incentives or bonus should be utilized to pay back the home loan. 
    They must curtail the contribution to PPF/EPF to minimum/ mandatory requirements. The EMI must be enhanced to the extent of surplus. 
    Life insurance policies are causing a drain on the cash flow. Premium for the Rs 6 lakh policy is Rs 32,400 per annum and Rs 5 lakh policy is Rs 24,000.00 per annum. Either covert them into a fully paid-up policy or surrender them. Purchase pure term plans. Money saved on the premium should be utilized to enhance the EMI. 
    In case there is an income loss due to some eventualities, then either consider liquidating one of the homes or sell the jewellery. Selling jewellery, though, should be the last option. 
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