25-year-old Sneha started working with a knowledge process outsourcing (KPO) firm about a year ago. She has managed to save some money and deployed it in the Public Provident Fund and National Savings Certificates on her father's advice. She's enjoying earning her own income and the independence it brings.
What She Has:
- Income: ₹40,000 a month
- Monthly Expenses: ₹20,000, including rent.
- Savings of 50,000 in PPF and 50,000 in National Savings Certificates (NSC)
What She Wants:
- Buying a car within 1-2 years
- Start saving for retirement.
What She Should Do:
- Emergency Fund: A 25 year old living alone shouldn't need too much emergency money. She should keep about three months income in a savings bank account.
- Health Insurance: Even though young people are likelier to stay healthy, medical expenses cannot be ruled out. Sneha should get health insurance of at least 2 to 3 lakh. Buying health insurance when young and renewing it regularly will automatically increase her sum insured. For help on how to buy it, she should look at: How to buy health insurance and A Top Up for your medical needs.
- Life Insurance: Those without dependents have no need to buy life insurance.
- Investment Portfolio
- Buying a car: Assuming a Rs 3.5 lakh cost, she should be setting aside about Rs 4,000 per month which she can invest in a top rated short term debt fund. She will be able to accumulate a corpus of about 100,000 in two years for the down payment. For the balance amount she can take a loan of Rs 2.5 lakh for which she will have to pay an EMI of about Rs 5,400.
- Retirement: It is not really possible to have a long-term projection of life or retirement needs before you have a family and before your career starts taking shape. However building the saving and investing habit is important. Sneha has managed to set aside some money as savings but has invested the same in the PPF and NSC on her father's advice. These instruments carry a low level of risk but earn relatively low returns and may not help her achieve her financial goals. Fixed Income products such as these are also vulnerable to inflation. Given her age, Sneha has the ability to invest in products that can deliver much higher returns in the long term. Therefore Sneha should ideally start a monthly SIP in one ELSS (tax saving) fund and one equity fund. Read this article to find out how: Choosing Your First Fund.
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