Youngsters must resist the urge to splurge

Pranjul Kulshrestha (23) is a young mechanical engineer. He lives with his parents in Mumbai and works in the private sector. His father works in the travel industry, while mother is a housewife.
What is he saving for?
Pranjul wants to purchase a house worth Rs 1.20 crore after three years. He also wishes to go on a trip abroad. The journey will cost him approximately Rs 2 lakh after a year.
The costs will be revised based on inflation.
Where is he today?
Cash flow: Pranjul's gross annual inflow from all sources is Rs 4.64 lakh against an outflow of Rs 3.58 lakh. The outflow includes routine expenses like transportation, clothing, care, insurance and entertainment. He has an EMI of Rs 8,057 for a car loan.
Net worth: The market value of all assets owned by Pranjul is worth Rs 7.02 lakh. Out of this, Rs 4.30 lakh is for consumption in the form of a car. He has an outstanding car loan of Rs 2.81 lakh.
Contingency fund: Against mandatory monthly expenses of Rs 23,000, the balance in savings bank, bank FDs, liquid funds and cash together amounts to Rs 2.34 lakh, which is equal to a reserve for over 10 months' expenses.
Health & life insurance: Pranjul's employer covers him and his family for health-related expenses of up to Rs 20 lakh. He also has a life insurance for a sum assured of Rs 6 lakh in the form of an endowment policy.
Savings & investments: Pranjul's balance in savings bank account is Rs 60,000, bank FDs Rs 1.72 lakh, and cash in hand Rs 2,000. His invested assets consist of equity mutual funds worth Rs 38, 250 apart from the bank FDs. His contribution to EPF started recently and, hence, has not acquired a significant amount yet.
Fiscal analysis
Pranjul is saving about a third of his salary. His health cover is sufficient. While currently he does not require a life cover, it will be needed at a later date and, hence, he should obtain one. Having an endowment policy is not very prudent. His car loan is within permissible limits. Pranjul's SIP in an equity fund is a good choice.
The way ahead
Contingency fund: Pranjul must keep aside funds equivalent to about three months of mandatory expenses. This comes to around Rs 65,000. Of this, Rs 15,000 should be held as cash in hand and the balance in an FD linked to a savings bank account.
Health & life cover: At present, Pranjul has a life cover of Rs 6 lakh. In his case, it is advisable to have a life insurance by way of a term plan in the next two years. The cover should be of at least Rs 75 lakh. Secondly, even though Pranjul has a medical cover from his employer, a family floater health insurance policy of Rs 25 is recommended for him.
Planning for financial goals
Home buying: Pranjul wants to purchase a house worth Rs 1.20 crore in the near future. For the time being, he can continue his investment in an equity mutual fund. He can then utilize the corpus so accumulated for the home's down payment. For the balance amount, he can opt for a home loan. If a home purchase is not very critical, then he should defer it for about five years.
Foreign travel: Pranjul can start a recurring deposit of Rs 8,000 every month. He should then utilize the corpus so accumulated to fund his foreign vacation.
Other goals: Since age is on Pranjul's side, he can consider starting an SIP in a mid- to small-cap equity fund for building a retirement corpus. Even a small investment on a regular basis will lead to a big corpus at a later date.
For young earners, the 20s and 30s are the golden years for savings. These are also the years when there is a newfound power of financial freedom: Not having to ask parents for routine expenses, etc, gives a great feeling. It is natural to want to purchase the world. Those who are able to balance the emotions between an urge to splurge and capitalize on the golden opportunity to build wealth will be the winners in a very short time. Just about 8 to 10 years of focused savings will place youngsters on a different trajectory of wealth creation for life.
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