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Tuesday, 1 November 2011

ET Wealth : Family Finances : Oct31-Nov6 2011

The ET Wealth Online personal finance weekly magazine has a Family Finances section that features one family every week for personal finance advice.  This week they featured a family with a monthly income of Rs 54000 (approx USD $1100)  The article is titled Low income likely to pose a big hurdle.  The first thing that struck me is the financial planner characterizing Rs54K per month as low income.  For an emerging economy like India wherein the average monthly income is in the Rs3000-5000 per month (~USD $100), it is a little strange to consider RS54K per month to be low income.  Probably the planner was taking into the account the financial goals of the family while pronouncing their income as low.
The cash flow situation did not look very healthy given the 54% expenditure (Rs11K + Rs18K) on rent + home loan EMI.  Going in for a ready to move in flat, would probably have been the better choice here, even if the cost of the flat would have been a little higher, to avoid having to pay both the rent and the home loan EMI concurrently.  Typically banks do not sanction home loans if the EMI is more than 45% of the net take home monthly income.  In this case, I characterize rent + home loan EMI as the total outgo towards house acquiring expenses and thus they violate the 45% rule (54% > 45%)

Finally they list 4 goals viz (1) Daughter's education (2) Daughter's marriage (3) Retirement (4) World Tour.  The planner is right in striking off the World Tour goal as unachievable giving the current cash flow and savings/investment situation.  Surprisingly he lists the retirement objective as the partially achievable goal with a lowered retirement corpus requirement ("Rs2 crore should be sufficient to see them through their post retirement years") based on some computations that he does not share.

I would have ordered the goals as follows (1) Retirement (2) Daughter's education (3) Daughter's marriage (4) World Tour.  In an income constrained environment, retirement should be the number one objective for any couple.  Their daughter can avail of an education loan when the time is right, and a personal loan if necessary to fund marriage expenses.  However, there is no concept of a "retirement loan" that anyone can avail of, when this critical need arises. 

In my opinion, a good financial planner/advisor should not only focus on crunching the numbers based on inputs from the client, but also help the client prioritize their goals based on a logical understanding of the way finances work, and not just based out of an emotional need to take on well-meaning but extravagant financial goals.  Though the usual advise regarding asset allocation, life insurance, health insurance, inflation based number crunching etc is all covered, I find the critical goal guidance missing. 

Of course this is just my novice opinion!  Let me know what you think.

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