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Sukrit (38) and Chhavi (35) - The high life

A high income is no guarantee of financial stability. Sukrit and Chhavi need to organize their finance and plan for their goals or they may not achieve them

Sukrit (38) and Chhavi (35) - The High Life

Sukrit and Chhavi are in their late 30s. Both have good jobs in the advertising industry and have a total post-tax income of Rs 3 lakh per month. However, as much as they work hard to earn their money, they love to spend it on living the good life for themselves and their 10-year-old daughter. Not only do they save only minimally, they generally carry over-substantial outstandings on their credit cards (currently about 250,000). They live in a rented apartment.

What They Have:

  • Income: Rs 3 lakhs a month
  • Monthly Expenses: Almost Rs 3 lakhs a month, including Rs 55,000 rent
  • Rs 4 lakh in PPF

What They Want:

  • Have an education fund of about Rs 50 lakh for daughter by the time she turns 18
  • Buy their own house
  • Save for retirement

What They Should Do:

  1. Emergency Fund: Given their lifestyle, Sukrit and Chhavi should have about Rs 10 lakh as an emergency fund. Generally speaking, an emergency fund should be about six months' full household expenses.
  2. Health Insurance: They should opt for a floater plan with a cover of at least Rs 10 lakhs. These two articles elsewhere on this site will give Sukrit and Chhavi all the information they need: How to buy health insurance and A Top Up for your medical needs.
  3. Life Insurance: The couple must ensure that they have adequate life insurance. They should buy a 25-year term insurance plan. The sum assured must be equal to at least five years income, which means around Rs 2 crore. These articles explain the process of choosing and buying insurance: Lest calamity strikes and How to really buy insurance. A wide range of advice and product-specific information is available at https://www.valueresearchonline.com/insurance/.
  4. Investment Portfolio: Sukrit and Chhavi should first pay down their credit card debt and bring down their expenses. The interest charged on credit cards is relatively high and a missed payment can greatly damage their credit score affecting future ability to borrow. Money for their child's higher education will be needed about 10 years hence, while retirement is at least 25 years away. Over these long periods, equity mutual funds work best.

They should build up an aggressive portfolio with the following distribution:

They should invest through SIPs and try not to time the market. In order to finance their home purchase, they should consider a home loan since this also carries tax benefits for interest and principal repayments under Section 80C. They should factor home loan EMIs into their expenses going forward. However rent will no longer be part of their expenses allowing their finances to adjust more easily.