Financial Planning

Planning for Family needs

Friday, January 11 2019
Source/Contribution by : NJ Publications

All of us have big dreams like going on a annual foreign holiday, buying a large house in a posh locality, sending our child to the best school / college and retiring in comfort at the age of 50 and we work hard and save harder toachieve them. Irrespective of our financial status in life, certain basic goals like child's education and marriage, purchase of house and our own retirement are non-negotiable and unavoidable. The sooner we plan and save for these goals, the better is the utilization of the power of compounding in our favour.

For the salaried employee, the 15 years of his life starting from 35 years going up to 50 years is the best phase of his life as he is at the peak of his career and income. If we apply the 80/20 rule here, then 80% of his lifetime investments in done in this phase of his life. Therefore, he needs to be prudent while allocating his money and not go overboard on any particular investment.

Let us examine some of life's critical goals in order of importance:

This is the single most important goal. As our lifestyles get more hectic and stressful, it is important for the earning member(s) of the family to be protected against any unfortunate events. Buying a term insurance plan is the best available option to protect your loved ones. Today, a Rs. 1 crore cover for a 30 year old non-smoking male for a 30 year term costs approx. Rs. 8,000 p.a. The same cover for a female will cost approx. Rs. 7,000 p.a.

As countries get more developed and our cities more urbanized, people have developed sedentary lifestyles with greater rates of obesity and consume more processed foods, alcoholic beverages and tobacco. The result is lifestyle related diseases like Alzheimer's, cancer, diabetes, heart disease, stroke, depression etc. are on the increase and account for majority of deaths in metros and cities. While this has resulted in a range of medical institutions and professionals on call to help people with these diseases, the costs of availing these services is escalating on a daily basis and is on the verge of becoming unaffordable for an average middle class person. Therefore, buying a health insurance policy either on a individual or family basis is critical to cover the family against any future health related emergencies. Today, a Rs. 4 lacs health cover for a 30 year old married person covering spouse and child will cost approx. Rs. 7,000 – 9,000 p.a.

According to a recent study titled "The Future of Retirement" published by Bloomberg which covered 20 highly developed and rapidly developing nations, India has the highest percentage of men 60 years or older in the labour force at 55%. Similarly, India also has the highest percent of elderly living in households with their adult children at 82.8%. The second highest is China at 64%. India is also among the top 10 countries in terms of percentage of elderly living in poverty at 21.8%. Retirement planning is clearly the most overlooked and avoided subject in any conversation among 30 year old salaried individuals. But as responsible and mature individuals, we have to take ownership of the fact that one day our salaries will stop and we will have to depend on our investments to fund our daily expenses. The sooner we accept this fact and start planning for our retirement, the more peaceful and stress free will be our retired lives. The cost of delaying retirement planning is best explained in the following example:

Even though Rakesh and Rajesh invest more money than Rajeev, their final retirement corpus is significantly lesser compared to Rajeev. This is the benefit of starting early and allowing the power of compounding to work in your favour.

The greatest gift that a parent can give the child is good and quality education. It is one of the toughest goals to plan for due to the competitive environment and high costs involved. Planning for your child's education involves determining when the child will be ready for higher education which is usually at the age of 21 or 22 years, followed by estimating the cost of the higher education today and on the target date when the child is 21 years. Cost of higher education has been increasing at approx. 10% p.a. Once we know the future cost of higher education, we need to work backwards to calculate how much to save on a monthly / quarterly basis and and in what investment avenues. Equities is the preferred investment for goals where the time horizon is more than 5 years.

For the average salaried person, this is a big budget goal due to the high prices of houses pan India. Home loans help to bridge the gap between the person's current savings and the cost of the house. Ideally, a house should be bought in the early part of a person's career as it typically takes 15 – 20 years to pay off the home loan. It is important to create a corpus which is approx. 20% of the cost of the house as this is the down payment that has to be provided by the home buyer. The rest of the amount will be funded by the bank. Balanced and income funds can be good investment options for creating the corpus for the down payment.

We need to classify all our goals into 3 buckets, namely short term, medium term and long term. Investments made for short term goals need to be more liquid in nature and less volatile as compared to investments made for medium and long term goals. A ready reckoner is given below to help you plan your investments in a systematic manner:

Whatever be our goals or dreams in life, it is important that we write them down, classify them as either short, medium or long term and accordingly select the appropriate investment options to help fulfill those goals.

"A goal that is not planned is a wish; a dream that is not chased is a fantasy." - Dr. Steve Maraboli


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