The First Step on the Money Management Diving Board

By | June 26, 2015


Water Parks mean fun time for everybody. Before entering the swimming pool or entering the wave pool, all of us first test the water with our toes to see if it’s too cold; then decide whether to take the plunge or not. When it comes to financial planning as well, it’s best to scope out the situation, test the waters and decide whether to take the plunge.

Suraj has been working for the past two years and is now thinking of getting married. He has, thus far, not been too keen on taking any major steps towards planning his finances. He only has a recurring deposit with a neighbouring bank for Rs. 5000 a month and the provident fund provided by his employer.

But, he wishes to start managing his money better. However, he is confused about where to start and doesn’t know how to go about it. Suraj’s friend suggested that he take the help of a professional financial advisor.

There are several people like Suraj who earn well when their single but do not think long term. It is important to consider all the different aspects of personal finance when planning your money. The first step in money management is to know where you stand. After evaluating your present position, you must understand the gaps, plan your finances and then put the plan into action.

In Suraj’s case, his financial advisor assessed his current situation by looking at his monthly cash flows, assets and liabilities. Suraj’s monthly cash flows looked as below:

Particulars Amount (Rs)
Monthly take home pay after all deductions 40,000
Monthly expenses 10,000
Disposable income 30,000
Investment in Recurring Deposit 5,000
Investible surplus per month 25,000


As Suraj currently stays with his parents, his monthly expenses are limited and do not include rent and house maintenance. As a result, his disposable income every month is Rs. 30,000. Of this, he invests Rs. 5,000 in a recurring deposit as mentioned earlier. He is left with a surplus of Rs. 25,000 on a monthly basis which can be potentially invested for his goals.

Next, the financial advisor assessed Suraj’s assets and liability position. As Suraj has not planned or invested in the past two years apart from the recurring deposit and the mandatory EPF, his assets are limited:

Particulars Amount (Rs)
Recurring Deposit (Rs. 5000 x 24 months) 1,20,000
Provident Fund (Rs. 3000 each by employer and employee for 24 months) 1,44,000
Bank Balance 6,00,000
Liabilities NIL


Suraj’s financial advisor came up with following plan for Suraj to follow:

Emergency Corpus: Having an emergency corpus is of paramount importance. He should have atleast 6 months of expenses in the form of an emergency fund. If he saves 10,000 for 6 months, the Rs. 60,000 can be invested in debt mutual funds or any other instrument which offers liquidity and also gives returns.

Health Insurance: Suraj should take a family floater health insurance for himself and his parents. When he gets married, he can include his spouse in the policy as well. Suraj can take a policy with a cover of Rs. 3 lakhs initially, and can then gradually increase it as the number of members in his family increase. This would cost him an annual premium of around Rs. 8000.

Life Insurance: Suraj should also cover his life risk and take a policy which can ensure a payment of benefits to his dependents. Presently, he does not have any dependents, as his father is also working. However, once he gets married, Suraj’s dependents and responsibilities will increase. Therefore, he must take a life insurance to cover the risk. Initially, he can take the cover for a smaller amount, say about Rs. 50 lakhs. As his liabilities and goals increase, this amount can be increased.

Goal Planning: This is the most critical part of financial planning. The investible surplus can be invested in the form of a Systematic Investment Plan in 3-4 good quality mutual funds to meet critical goals. Short term goals can be planned by investing in debt, while equity can be chosen for long term goals. Retirement is an important goal and Suraj should start saving from today to build his retirement corpus.

In addition to the above, Suraj should also take steps to save as much as possible on taxes. He should make efforts to make full use of the available benefits under various sections of the Income Tax Act.

Suraj also plans to buy a house worth Rs. 25 lakhs for investment. However, purchasing a house at present would entail a down payment of Rs. 5 lakhs and an EMI worth around Rs. 19,300 per month. Suraj should evaluate if he really needs to invest in real estate immediately or if he can wait for a few more years before buying a house. Purchasing a house jointly with his father or spouse can enable Suraj to purchase a larger house or avail a higher loan amount.

With financial planning, all the decisions are in your hands and with good planning, you can make good returns. Of course, in a water park, your friend might just push you into the pool before you can stick your toe out.


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