1. Emergency / Reserve Fund
This is the first step of financial planning. Amit should have a reserve fund equivalent to meethis 3 to 6 months expenses. A reverse fund is needed for the purpose of covering unforeseeableexpenses like medical emergencies or temporary job loss etc. With an adequate reserve fundAmit will not be required to dip into his investments in times of crisis.
Life is full of uncertainties and so it is imperative that one has adequate insurance cover to helpmitigate the risks that might arise due these uncertainties. A term insurance plan for Amit wouldensure that the family’s survival is not at stake in Amit’s absence. Amit’s insurance cover shouldbe equivalent to the present value of his future earnings till his retirement. Also Amit should buya good health insurance policy for the entire family to take care of any expenses that might arisedue to medical emergencies. Amit’s parents are dependent on Amit. If his parents gethospitalised due to some critical illness the huge hospital bill can burn a big hole in Amit’spocket.
3. Child Education Fund
Amit wants his son Karan to become a doctor. Amit wants to start saving for his son’s educationfrom now onwards. If the cost of the course as on today is Rs. 10 lakhs then the same course willcost Rs. 41,77,248 (Rs. 42 lakhs approximately) 15 years down the line if the cost of educationincreases by 10% (inflation) every year. If Amit wants to reach this target of Rs. 42 lakhs 15years down the line then he will have to start investing Rs. 9300 per month (Rs. 1,12,000 perannum) if his investments earn him a return of 12% per annum.
4. Child Marriage Fund
Amit wants to start saving for his son’s marriage from now onwards. The marriage is planned 18years from now. If the cost of an normal wedding as on today is Rs. 6,00,000 then the samemarriage will cost Rs. 33,36,000 (33.36 lakhs) 18 years down the line if marriage expensesincrease by 10% (inflation) every year. If Amit wants to reach this target of Rs. 33.36 lakhs 18years from now then he will have to start investing Rs. 5000 per month (Rs. 60,000 per annum)if his investments earn him a return of 12% per annum.
5. Buying a House
Amit wants to buy a house worth 25 lakhs 3 years from now. For this he will have to make adown payment of Rs. 5 lakhs (20% margin money). He will have to start setting aside Rs. 13,000every month in a recurring deposit account.
6. Annual Vacation
Amit wants to go for an annual vacation every year. This will cost him anywhere in the range of Rs. 25,000 to Rs. 40,000. Amit can make provision for this from his monthly cash flows. He can