Tuesday, August 25, 2015

Help on financial situation

After reading few of my money related posts, my friend asked me to talk to his uncle. When I inquired, he said he needs some planning and hence I should meet him and help him. My immediate reaction was - wrong number. I am not the right person for financial planning. I said that I can arrange for the names of fee only planners. Pattu has collated that list and is available on his site. However, his uncle was not ready to meet any professionals and pay them. My friend again requested to meet his uncle. I had to relent, finally.

The uncle belongs to low income group. His monthly earnings are around 15k from a job. He is extremely frugal and it felt really nice meeting him. As per him, his financial status is comfortable. My friend felt otherwise and hence the meeting request. I met his uncle few times to discuss about his goals and cash flow.

He belongs to typical 80s-90s generation. His entire portfolio consists of 2 two thousand RD and plenty of endowment plans. The annual premium for these policies is around 20k. He manages that efficiently. That is due to the frugal lifestyle of the entire family. They do not find any need for financial planning or so. Still we went ahead and created a rough road map for him.

Photo Credit: Flickr - Abductit

Below are the highlights from the road-map:

First, he asked me if anything at all was needed to be worked upon his folio. I told him that he was severely under-insured. He protested. He said he was having X number of endowment life insurance policies. I replied that he had 2 children - a boy and a girl. I asked him if he is expecting to spend money on their marriage. He said no. I asked the same question again and still the answer was no. We noted it down. Then I asked him if he was expecting to spend on their education. To that, he said yes. We calculated a modest cost for B.Comm/B.Sc and inflated it for 6 years.

Then we calculated their annual expenses and multiplied it by 8.
Then I added above figures and told him that this was supposed to be his insurance amount. The current amount was 1/10th of the required amount. 
He was shocked. He understood the concept. Then we calculated amount needed for his retirement. This was again a shock. He wanted to believe but was scared to acknowledge.

We then talked about health insurance too. He is above 40 and health insurance would not be cheap. So that was dropped and we prayed. For investment he said do whatever you want. This scared us. He was showing complete faith in both of us. He was willing to book profit or loss, whatever we said. We discussed a lot. He asked me if I had any endowment policy. I said yes, had took that but thank God, I realized the mistake and surrendered it. To this, he asked me if he should too follow the same thing i.e. surrender and book the losses. We three thought about it and decided against it. 

The reasons considered were:
  • Most endowment plans have completed more than 10 years. No point in surrendering now. It would be difficult to recover the losses.
  • If we surrender everything, his insurance would be zero and term insurance is very costly at his age and diseases. We calculated premium for a random term plan and it was premiumly (can we add such a word to dictionary?) premium amount. He was against it and we could not force it.
  • He may probably blow the entire corpus received.

We took some action as well:

  • We asked him to buy an accident policy and life insurance policy. Both would be from the recent pradhan mantri yojnas.
  • We asked him to start a SIP of 1k in FIBC. We have asked him to keep on monitoring his cash flow. If favorable, increase the SIP amount.
  • We asked him to say no to all the people and new product launches (this is a priceless advice from Subra)
  • Importantly, we have asked him to start another RD of 1k and treat the corpus from all 3 RDs and emergency funds. Currently, he has some amount in bank FD too.

The big plus point is his house. He has inherited a decent flat in a good Mumbai suburb location. Moreover, he is willing to sell this flat and move to any cheap suburban area, if the situation arises. His family stood by this decision.

I have again asked him to meet a fee only financial planner. I told him that there is a difference in the general advice given by a novice and an expert financial professional. He has not said yes but has not said no either. We may try and persuade him in near future. Till then this is the road-map.

Readers - Any suggestions on this plan? Do let us know if any changes are required.


  1. Things are ok as this point of time.



    1. Thank you Ashal bhai for validating the theory. We are trying to convince him to act fast on all the action items.