Got everything but still have nothing

This is the story of Reddy family, a couple in their mid-30's. Both of them are salaried and have pretty much everything they need as may be seen by a third person. However the couple feels that they have nothing. Here is a short synopsis of their cashflows:

* Inflows stand at R63,000 per month ie R7.6 lakh pa (combined salary of both).

* Outflows are R45,000 per month (R15,000 for living expenses, R16,000 for home loan, R8,000 for personal loan, R6,000 for car loan)

* Savings happen at the rate of R18,000 per month (about R13,000 towards some policies, R2,000 in recurring deposit and R3,000 for SIPs in MFs)

This was as per the financial plan created by his advisor. The logic inherent was that Reddy needed R1 crore of life insurance. This was based on certain calculations, his loan liabilities added to that figure and thus a life insurance amount of R1 crore was arrived at. Thus the advisor suggested that only when the life insurance was taken care of should they look at investments.

Prima facie there is nothing wrong in this plan whether in fact or statistics. However, this plan does not seem to work, else the Reddy's would not have this nagging feeling that they are not moving anywhere. In my view, this plan has caused severe harm to Reddy's financial health. Here's why.

This situation has left them cash-strapped. They have no cash hence the feeling of having nothing. If they want to spend any big amount, the only way is more loans which they cannot afford as there is no surplus fund to repay EMIs. Though their living is modest they will take many years to see wealth and may still not see anything substantial. A negligible amount today is going towards wealth creating assets ie only R36,000 per year. Life risk management, ie life insurance planning, has been wisely suggested however flawed product recommendation has been made at the cost of sacrificing long term wealth creation. The culprit is the huge insurance premium. With R1.6 lakh pa as premiums, it has brought them insurance cover of only R26 lakh via endowment and money-back policies. Not much has been achieved with this.

... contd.

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