Forty-eight-year old Ram Kumar Mehta (name changed), lives in a middle-class housing society in Gandhinagar. On the face of it Mehta doesn't need any financial planning (he's worth Rs 8 crores).

Yet he wanted a financial plan, just to make doubly sure his finances were in order.

Rags to riches

This thought stems from the fact that Ram Kumar has worked his way up, through a series of hardships. A 'rags to riches' story in the true sense, he is an intelligent man who has been planning in his own way.

He knows how much money he will need and when. For example, how much money will he need on retirement, what will his annual in-flow be each year, how will his child's post graduation be funded, and so on.

Mehta has assets in real estate, ULIPs, traditional insurance policies and mutual funds. He is set to get over Rs 1 crore (Rs 10 million) from the maturity values of his insurance policies alone (having life insurance worth about Rs 60 lakhs (Rs 6 million), for which he pays about Rs 500,000 per annum) - and this income is not a part of his Rs 8 crore wealth!

However, financial deprivation in the past has left Ram Kumar rather stingy; he prefers to use a bike instead of a car, takes a holiday just once in 5-7 years (that too under family pressure only), and tightly controls other family expenses such as jewellery and clothes.

In short, he is paranoid that his money will get used up and his family will have to face financial deprivation as he did.

So, even though everything seems hunky dory, he wants a reality check.

The verdict

After much anticipation, Mehta finally gets his financial plan.

According to the analysis, he needs about Rs 4 crores (Rs 40 million) to achieve all his financial goals, and live a very comfortable life without cutting corners or compromising, assuming his life expectancy is 85 years.

Against this, he has amassed more than Rs 8 crore - far more than he needs.

He does not need any life insurance.

The reason for this discrepancy - several shortcomings in his calculations.

Mehta did the compounding effect i.e. reinvestment of funds into consideration. He ignored the extra money available each year after his needs were met, and did not take into account the reinvestment of that extra money.

Over and above he has grossly over-budgeted everything. He had not planned a redeployment of funds upon their maturity.

The effect of these miscalculations -- the Mehtas have made a lot of compromises in their lifestyle, when in fact they could afford a plush mansion, chauffer driven cars, holidays abroad, education in an international school etc.

Lessons learnt

Ram Kumar Mehta's story drives home one point. Financial planning is necessary for both people who have limited funds, as well as those with substantial sums of money.

It especially helps if you are nervous about how to achieve your goals or want a reality check on your current plan.
As for Ram Kumar, he cannot help smiling to himself; he is reassured by the fact that in the years to come, he will amass several times more money than he had anticipated earlier. That he can now retire immediately and not have to work and earn anymore.

Life is a bed of rose petals now.

The author an expert at Financial Planning, is a Certified Financial Planner and a Chartered Wealth Manager. He may be reached at kartik.jhaveri@transcend-india.com.