Recommendations for Mr. Smith

The previous post highlighted the position of Mr. Smith. His main stated goals are planning for his child’s future and creating a suitable corpus for his own retirement. Considering his goals and his current financial position, it is necessary to prepare a comprehensive financial plan so that he is in a position to realize his financial goals.

Managing short-term liquidity and contingency requirements

Mr. Smith has a bank balance of only Rs. 1,00,000/-. This figure is certainly not adequate for meeting any short term contingency.

Apart from monthly EMIs totaling Rs. 60,000/-, he also needs to meet other mandatory monthly expense* of Rs. 46,671/- ( Rs.5,60,059 / 12). This position is particularly alarming because his EMI obligation and majority of investment in long-term assets. Therefore, he needs to build some short-term asset which can be accessed by him in case of any eventuality. For this purpose, he must have savings at least equivalent to his three months’ mandatory expenses, which is nearly Rs. 3,20,000/- [3*{Rs. 46,671+(Rs. 7,20,000/12)}]. He already has Rs. 1 lakh in his bank account, so he needs to increase this reserve by Rs. 2,20,000/-. He should have at least Rs. 3,20,000/- in near cash avenues such as in savings account and short-term liquid deposits.

Though the returns offered by bank deposits are very low, parking a calculated amount in such avenues is unavoidable to circumvent any unforeseen  emergency.

*Other mandatory monthly expenses include insurance premium, house maintenance and water tax, food and grocery, transportation, clothing / personal care, medical care, utilities and miscellaneous expenses.