Planning whiz – June 2022

Financial Planning

This month Gibin John, Geojit’s Investment Analyst guides a young couple who wants to plan for their life goals such as buying a house, car, child’s education, and retirement planning. Gibin analyses their current investments, assets and liabilities and helps them plan to achieve their goals.

I am Das, 34 years old and my wife is 31 years old. We have a son, aged5 and he is studying in 1st standard. We are working for an NBFC. Currently, I am getting an average monthly income of Rs. 65,000 and my wife earns Rs. 55,000 after all deductions. Our monthly living expense is Rs. 40,000.
We wish to get valuable suggestions and guidance from you on how to manage our money. Currently, I have share-holdings worth Rs. 2 lakh and mutual funds worth Rs. 5.50 lakh. Also, my bank savings account balance is Rs. 6 lakh. I wish to invest this amount based on your advice. We are residing in a rented flat and the rent is Rs. 15,000. We need Rs. 10 lakh for our son’s higher education. I want to buy a flat within 3 years and the expected cost is Rs. 50 lakh. If possible, I want to change my car after five years, the expected cost is Rs. 12 lakh. Please guide us how to manage our investments and achieve our goals and build a retirement corpus in time.

Gibin John, a certified financial planner replies

A well-prepared and implemented financial plan can help any individual to achieve all realistic goals in life. Hence, it is important to prepare a plan for your personal finance. Your monthly average income is Rs. 1.20 lakh and expense is Rs. 55,000, including rent. The surplus amount available for investment is Rs. 65,000. Firstly, you must set aside a contingency fund. This will help you to meet any unforeseen situation in your personal life. Normally the size of such a contingency fund must be at least 3 to 6 times of the monthly expenses. We recommend you to earmark Rs. 3 lakh from the existing bank account balance as an emergency fund. You are planning to buy a flat in three years and expect a cost of Rs. 50 lakh. You have already fixed the budget
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for the goal, so we are not considering the inflation on this cost. Creating this amount in a short period is not possible so you may invest Rs. 50,000 every month in debt mutual fund which has the capability to create more return than the bank recurring deposit. You can create a corpus of Rs. 20 lakh from this investment. Also, allocate Rs. 3 lakh from savings account and shareholding of Rs. 2 lakh for this purpose. If these investments fetch a 7% return next three years then the value of the investment will become Rs. 6.12 lakh and the total corpus for this goal will become Rs. 26 lakh. For the balance amount, you need to take a home loan with an an18-yearterm, till the age of 55. The EMI for this loan will be around Rs. 20,500. You can utilize your existing rent amount Rs. 15,000 so an additional commitment of Rs. 5,500 added to your cash outflow.
Your next goal is son’s higher education. You are expecting Rs. 10 lakh to be the education cost. If the education cost is inflated at 8% then this cost will become Rs. 23.50 lakh after 11 years. For the next three years, you need to allocate more amount towards accumulating the corpus for purchasing a flat. Therefore, you can start investing for your son’s education after three years. This a long-term goal so you can start investing Rs. 17,000 every month in equity-oriented mutual funds, after achieving the first goal. We assume an average 9% return on this investment during this period which will help you achieve the goal.
You are also planning to change your car in five years and the expected cost is Rs. 12 lakh. But this is an optional goal for you. We are expecting the cost of the same variant car may increase by 6% p.a., so the value of the car at the time of the goal date will be at least Rs. 16 lakh. You may allocate Rs. 12,000 from balance surplus amount left after investment for the first goal. You will be able to create an amount of Rs. 8.50 lakh in five years. Also allocate mutual fund investment of Rs. 5.5 lakh towards this goal. If this investment gets an average return of 7% then the amount will become Rs. 7.5 lakh. These investments will be sufficient to fulfill this goal.
In your retirement plan, you are expecting a living cost of Rs. 25,000 in today’s value. You are planning to retire at the age of 55. There are 21 years left for retirement. The expected living cost then would beRs. 84,989 if the cost is inflated at 6% per year. For getting this inflation adjusted amount during the post retirement period, till 80 years, you have to accumulate a corpus of Rs. 2.27 crores at the time of retirement. For accumulating this amount, you have to invest Rs. 44,000 per month, preferably in equity oriented mutual fund after achieving the first goal. But the available balance is only Rs. 30,000. You should start with this available amount and after the achieving the other two goals i.e. buying a car and accumulating a corpus for your son’s education, the funds allocated to these goals should be diverted to the retirement goal. You could also invest larger amounts as your salary increases.
You should also take a family floater health insurance of Rs. 5 lakh immediately to protect your family from any unforeseen medical expenses. Also, take term insurance of minimum Rs. 1 crore to meet the living expenses of the family and fund family-oriented goals even in your absence. For this purpose, you need to find Rs. 2500 from existing income by reducing expenses.

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