FAMILY BUDGETING:It teaches children values like sharing and delayed gratification

FAMILY BUDGETING CAN BE A FUN THING

It teaches children values like sharing and delayed gratification, says financial planner
Gaurav Mashruwala

    Pankaj Mistry was born into a business family. Wealth was never an issue for all necessities and even many luxuries. However, it was also not easily accessible. When the children needed something they had to request the parents and only if they thought appropriate, they would get it, but after a gap of a few months. Pankaj is now 26 years old but this early financial grooming still informs his habits. In fact, for some time he and his wife Dhwani diligently wrote down the family budget and tracked their bank accounts. Pankaj works in the financial sector. Dhwani is a housewife. They live with Pankaj's mother and elder brother and sister-in-law.
WHAT ARE THEY SAVING FOR?
(1) Firstly, they wish to purchase a house in the next 1.5 years, costing Rs 35 lakhs. (2) Their second priority is to create a retirement corpus worth Rs 40 lakhs after 35 years. (3) Once they have a family, they need Rs 7 lakhs for the child's higher education and Rs 8 lakhs for marriage. All the costs are at today's rate of inflation.
WHERE ARE THEY TODAY?
Cash flow: Total yearly inflow from all sources is Rs 6.30 lakhs. Against this, the outflow is Rs 2.22 lakhs, which includes routine household expenses, insurance premium, taxes and EMI towards two-wheeler loan. EMI constitutes 7% of inflow. Net worth: Total market value of all assets is Rs 4.92 lakhs. This includes cash/near-cash assets worth Rs 2.15 lakhs, invested assets of Rs 1.32 lakhs and assets for self-consumption Rs 1.45 lakhs (which include jewelry and a bike).
Contingency fund: The mandatory monthly expenses are Rs 16,000, but the balance in the savings bank and cash is Rs 2.15 lakhs. This is equivalent to about 13 months' expenses. Health & life insurance: Pankaj's employer covers Pankaj and Dhwani
for their health-related expenses upto Rs 4 lakhs. Total life cover in the form of an endowment policy is Rs 8 lakhs. Borrowing: Borrowing is within limits. Loan will be fully paid back by August 2009.
Savings & investments: The balance in the savings bank is Rs 2 lakhs. Cash at home is Rs 15,000. The market value of direct equity is Rs 20,000 and equity mutual fund, Rs 85,000. The balance in EPF/PPF account is Rs 27,000.00.
Tax: The couple is not utilizing the Section 80-C benefit completely.
FISCAL ANALYSIS: They are living within their means. A large portion of the inflow is being saved - this is reflected in the huge balance in the bank account. However, those funds are not being invested and so not generating optimum returns. Health insurance is sufficient. Life insurance is very low. Loan is very well within limits. Tax planning is not prudent.
WAY AHEAD:
Contingency fund: Keep only Rs 50,000 for contingency. This should be kept in the form of cash at home - Rs 15,000 and balance in a savings bank liked to FD.
Health insurance & life insurance:
Currently, health cover is sufficient. Increase life cover to Rs 75 lakhs through term plans.
PLANNING FOR FINANCIAL GOALS:
Home buying: Home purchase within one year, with the help of a home loan, seems possible. However, if there is no immediate emergency, try and accumulate maximum corpus for down payment. This will ensure that the least possible amount has to be borrowed. Also, do not borrow for more than 10 years and go for a floating rate of interest.
Retirement corpus: Retirement is more than three decades away. Try and aggressively pay off the home loan in the next decade before focusing on retirement.
Children: Once you have a family, start an SIP in two funds - index fund and international equity fund. Initially begin with Rs 5,000.00 every month and step it up by 20% every year.
Tax benefit: Ensure total savings in EPF and PPF is Rs 70,000. The balance Rs 30,000 to avail of Section 80-C will be in the form of insurance premium.
(To be featured in this fortnightly column, write to
moneymakeover@indiatimes.com) PLANNER'S EYE
Most families consider budgets a restraining factor and invariably give it up under some pretext or the other. Actually, a family budget is like a menu card. When we go to a restaurant, we pick up a menu, view the list, order our favorite dishes and pay for them in the end. Imagine what would happen if we ate whatever is served to us (without ordering it) and we have to pay for it. Not having a budget is a bit like the second scenario. You end up spending recklessly. Families which sit together at the beginning of every month/quarter/year and decide how much they should spend on different headings live a healthier financial life. They are more in control of their finances. Of course, there will be some differences initially, but over a period of time this can be a fun exercise. This will teach children how to compromise on their needs for the sake of others and also teach them delayed gratification. Take it slow. To begin with for about a year or so, plan budgets only for vacations and entertainment. Later add, clothing, accessories and big ticket purchase. Only after about three years get into completing family budgeting.