Financial planning for a working couple

By bankbazaar | April 23, 2010

The Rameshs currently are saving/investing only about 14% of their total income. This is way below the national average of 28%. They need to create a budget tracker and enter details on a regular basis to find where they are spending more. They need to start this immediately as they will face a severe cash crunch from increased expenses, once their baby is on the way.

Ramesh (27 years) and Sathya (26 years) are a couple working in Bangalore. They are both gainfully employed in IT companies. Their salary incomes are Rs.3,60,000/- and Rs.3,30,000/- respectively. Apart from this Ramesh has agricultural income of Rs.72,000/- per year from his ancestral agricultural land in Tanjore.

The Rameshs do not have any children now. They are planning to have one in the next year. They are staying in a rented house with Rs.9,000/- as rent. The rent is being paid from Ramesh’s bank account.

Current Investments

The current investments of the Rameshs are in their company EPFs to the tune of Rs.17280 and Rs.15840 respectively which works out to 12% of their basic salaries. Apart from this Sathya has a Mutual fund investment of Rs.2,000/- on a monthly mode. The mutual fund is not an ELSS. Each one of them is paying life insurance premium in endowment plans with life cover of Rs.5 lakhs each; the premiums paid being Rs.25,600/- and Rs.23,400/- respectively. The premium needs to be paid for 20 years.

Their current expenses prevent them from saving anything more.

Suggestion for Tax Planning and Financial Planning

The basic faux pas related to tax planning for Rameshs is the payment of rent from Ramesh’s account only. This is because to get the tax benefit of the HRA, the payment has to be made from Sathya’s account too. Their eligible rent to be paid is Rs.9200/- per month together. Since the entire rent of Rs.9000 is being paid by Ramesh only, his HRA component of Rs.48,000/- only can be made use of for tax concessions.

Tax Saving Investments

Rameshs currently do not have any beneficial tax saving investments. The mutual fund though wealth creating does not save tax as it is not an ELSS (Equity Linked Savings Scheme) fund. Since they could not save a higher amount immediately, the current investment itself could be shifted to an ELSS fund.

The endowment plan which is the largest investment for the Rameshs is a typical case of asset class mismatch. This is a savings scheme for the long term of 20 years with expected yields of only about 8%. Alternative investment can be in another ELSS fund or a ULIP with low charges and minimum 5 lakhs life cover.

Increase Life cover

The Rameshs do not have enough basic life cover. Using the income replacement method at a current bank interest rate of 7.5%, Ramesh will need a cover of Rs.48 lakhs and Sathya requires a life cover of Rs.44 lakhs. The premium for term plans for the required covers will only be Rs.11,000/- for Ramesh and Rs.8,000/- for Sathya.

Increase Savings

The Rameshs currently are saving/ investing only about 14% of their total income. This is way below the national average of 28%. They need to create a budget tracker and enter details on a regular basis to find where they are spending more. They need to start this immediately as they will face a severe cash crunch from increased expenses, once their baby is on the way.

Health Plans

They need to start a health plan and also start saving for expenses related to child birth and child care thereafter. The health premium for their age group for Rs.2 lakhs cover will be about Rs.2,500/- each. Except for a few employer based health insurance plans, complications related to child birth are not covered by health insurance plans. Checking with their company HR managers on their company offered medical cover is required.

Overall Objective – Tax Saving Vs Financial Planning?

In their current income levels, the Rameshs should focus on financial planning rather that saving tax. This is because their current taxable income, post their investments and their HRA expenses, is currently in the 10% taxation bracket only. This means that the tax saving: investment required ratio is 1:10 (they need to save/invest 10 times the amount of tax that they plan to save). This will entail that they save their entire quantum of Rs.1 lakh under the Section 80C benefit.  This is not possible at the moment for the couple. So it is better for the Rameshs to pay a portion of their tax liability and focus their investments/ savings on their financial goals.

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