My mother and younger brother are my two financial dependents. I plan to get married by the age of 33. My brother is pursuing his MBBS for which I have taken an educational loan and pay Rs 13,000 as monthly EMI which will continue for three more years.
I have a term insurance policy for Rs 25 lakh from LIC. The monthly net cash flow will increase by Rs 6,000 from May 2012. I don't invest in tax saving instruments as I get deduction for the interest portion of the educational loan EMI. Kindly guide me to meet my future financial goals.
For a 28-year old, you show extreme responsibility and maturity the way you are handling your finances. You have not stated how much of your income goes towards household expenses. We are assuming that from the Rs 15,000 that you are left with after paying the education loan equated monthly instalment (EMI); at least Rs 10,000 goes towards household expenses with Rs 3,000 being invested in the four mutual funds that you are currently investing in.
The first step towards financial stability is to know exactly how much you earn and where the income goes. The mandatory NPS contribution will somewhat take care of your retirement means and that it offers tax incentives only complements the low-cost structure of this long-term financial instrument.
Play it safe
* You have just about adequate life insurance cover right now. You should take a fresh look at it once you get married.
* The moment you go in for a home loan, you should consider taking an additional term insurance plan to safeguard the loan. Alternatively, you could look at home loan insurance where the amount of the loan is insured. But make sure you do not get ripped off by an overzealous lender who comes up with an expensive proposition of bundling a term plan with the loan.
* Consider a health insurance plan for you and your mother. You can consider a floater policy or get individual plans for each of you.
* Though you have not shared details of your bank balance; we feel you should keep at least 2-3 months of household expenses, including the education loan repayment as buffer in a bank deposit in case you are indisposed or have to be on leave for a couple of months. This emergency fund will help you tide over the on-going financial obligations.
Go easy on debt
Although you have clearly articulated your goals, we are not too comfortable with your desire to fund them by way of taking loans. You are 28 and already servicing an education loan towards your brother's education. This will continue for another three years. We do not think it is wise to saddle yourself with a car loan and then few years down the road take on a home loan too.
Ideally you should be paying less than 35 per cent of your take home pay to service debt. Likewise, you can check the gearing ratio, which indicates the percentage of total long-term loans to one's total assets, which should be less than 50 per cent. The higher debt servicing and gearing ratio are warning signs towards a debt trap. Make sure you use debt smartly and not become a slave to EMIs.
Taking a loan for the car is not the best of options. Unlike a home loan which is useful to build an asset, a car loan is asset depleting. Moreover, you need to analyse the benefits the car can offer. Buying a car is one thing, running and maintaining it is another. Unless in some way the car will help you augment your income or it offsets your current travel expenses, the car will be at best a social symbol. Considering the prudence shown by you in availing an education loan to get your brother educated, the car is not a priority for you at this stage. We suggest you drop this plan for the moment and instead save more towards a home loan down payment.
Five years from now when you plan to buy the house, you would be married with additional financial responsibilities. The cash flow needed to run the house will increase and there is every possibility that the budget assigned by you for the house will change. You may need to rescale the sum necessary for the home. Alternately, there is a possibility of your income rising significantly over the next five years which could allow you to borrow more.
Considering your current income, including the additional Rs 6,000 that you will receive from May this year, the only goal you can achieve without borrowing is your marriage. While this is an important milestone in one's life, we feel you should consider spending less on this event if possible. Please avoid taking a loan for the marriage. Taking loans beyond one's means to repay or borrowing in a way that leaves you with a very tight cash flow is a definite path to a debt trap and should be avoided at all costs.