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Home > Business > Personal Finance



Rich or not, financial planning is must

Kartik Jhaveri, Moneycontrol.com | June 05, 2007 08:54 IST

Akshay Mehra, 45, is an executive with an multi-national bank, and has just bought himself a brand new Mercedes. He's thrilled about his new purchase and is now planning to buy a house in a new upcoming area of the city. The cost of his proposed house - a staggering Rs 4.5 crores (Rs 45 million)!

And he is going to get a princely 1,500 sq ft of built-up area, which would translate to about 1,000-1,100 sq ft of carpet area.

Of course, he is paying a highly inflated price but he thinks he's a rich man, with lots of money. This is true to an extent. But by the middle to end of the month he tones down quite a bit and waits for the next month's payment.

Take a look at his financial status, based on his own calculation:

AssetsRs in lakh

Proposed house 

Rs 450

2 cars

Rs 45

House in netive town

Rs 30

Paintings

Rs 100

Unsecured loans

Rs 50

Cash in bank 

Rs 50

Total 

Rs 685

He thinks money will never be a problem and there will be an unlimited supply for him.

But in my opinion his financial management is quite ridiculous, and he is being even more ridiculous, by buying a house, which is so over-priced. But he thinks he's doing the right thing, and considers spending money as a demonstration of his status.

While it is somewhat true that such assets add to his status, the worrisome factor is the cost one is paying for that.

LiabilitiesRs in lakh

Proposed home loan
(EMI will be Rs 3.5-4
lakh per month)

Rs 350

Let's take a closer look at his situation.

He does not own a single liquid or near liquid asset. His cash will be spent sooner or later. What about contingency funds? What about life insurance? Health insurance? He fails to realise that no job is permanent, and the higher one is up one is, in the corporate hierarchy, the more difficult it is to find a similar and/or higher role.

If he was to be out of a job for even 3-4 months he will be doomed. There is no way he will be able to afford his own lifestyle. What about his massive home loan EMI?

His assets do not have a steady growth rate. They may touch the sky at one time or fall to half the value or even lesser. Besides, he will not be able to sell his house, as he lives there. His parents are retired and live in a house in their native place, which also cannot be sold.

Cars depreciate in value rapidly. There is uncertainty of growth in the value of paintings from which he is planning to fund his children's higher education.

Not a single asset he owns, can be liquidated easily. Also, he needs about 1 crore to fund his downpayment for the apartment he plans to buy. He is considering taking some personal loans for that. Or else, he may have to sell half of his paintings.

He has already issued a 25 lakh cheque to the builder and has signed on the agreement for sale.

He has not considered stocks, mutual funds; he thinks it is too risky. But he enjoys having banks/ brokers chase him for his money. He has given an unsecured loan to some broker who has given him a written confirmation to pay him 15 per cent pa. This is the kind of investment he likes to do.

Strangely he does not think THIS to be risky. He might just lose his principal in being greedy to earn a guaranteed 15 per cent pa.

So, what do you make of a person who earns about 6 lakh per month (post tax), plans to spend 2/3rd of that on paying EMIs, and in general, thinks financial planning is for people who don't have money? In my view, if there's someone who really requires help -- it's Mr Mehra!

Kartik Jhaveri, an expert at Financial Planning, is a Certified Financial Planner and a Chartered Wealth Manager.

For more on financial planning, click here






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