Planning Whiz – August 2022

Plan for retirement

Geojit’s Investment Analyst, Gibin John, helps a young businessman with his financial planning. Most self-employed professionals and entrepreneurs know that managing money when income is irregular can be tough. And this is because the expenses are recurring in nature, but the money to meet them may not. However, one can overcome this challenge by adhering to a well-thought-out plan. Gibin advises him on how he can invest to expand his business, for his son’s higher education, and build a corpus to buy a new car.

I am a 35-year-old businessman, and my wife, aged 34, is a housewife. Our son is studying in LKG. I regularly trade in stocks, and I have mutual fund investments also. Currently, I am getting average monthly income of Rs. 90,000 after all expenses. Our monthly living expense is Rs. 48,000.

My income is irregular in nature and therefore, we are unable to manage our investments properly. We are writing to you for getting your valuable suggestion and guidance on how to manage our money.  Currently, I have a shareholding worth Rs. 7.5 lakh and mutual fund investments worth Rs. 3.75 lakh. Also, my bank savings account balance is Rs.  4 lakhs. We are residing in our own house.

Talking about my financial goals, I plan to develop my business and the expected cost is Rs. 15 lakhs.  For our son’s higher education, we need Rs. 10 lakh. I also wish to change my car after 4 years and the expected cost is Rs. 13 lakh.

Please guide us how to manage our investments and achieve our goals on time.

Gibin John, Geojit’s Certified Financial Planner replies:

It is important to prepare a well-thought-out plan for your personal finance. In your case, the business income cash flow will be irregular, making it difficult to manage monthly investments. I would suggest you make investments on a quarterly basis so that you can easily manage your money.  Your monthly average income is Rs. 90,000 and your expense is Rs. 48,000.  The average surplus amount available for investment is Rs. 42,000.

Firstly, you have to set aside a contingency fund. This will help you to overcome any unforeseen situation in your personal life. Normally, the size of contingency fund has to be at least 3 to 6 times of the expenses. We recommend you earmark Rs. 3 lakh from the existing savings account balance of Rs. 4 lakh as emergency fund. Let me underline, that this is the emergency fund for your personal life and for business related emergencies, you should create funds separately.

Creating a corpus for developing a business is one of the main goals you have mentioned. I understand that the future cash flow from the business will be based on these developments.  You are planning to create a corpus of Rs. 15 lakh for this purpose. For creating this amount, you shall invest Rs. 65,000 every quarter (the monthly average will be Rs.  22,000) in debt mutual fund which has the capability to create more return than the bank recurring deposit.

Your next goal is your son’s higher education. You are expecting Rs. 10 lakh to be the cost of education. If the education cost is inflated at the rate of 8% p.a., then the cost of education will be Rs. 27 lakh at the time of his higher education. Since you have enough time in hand to create corpus for this goal, you can invest Rs. 28,000 (monthly average of ₹ 9,500) every quarter in equity oriented mutual funds. We are expecting a 9% return from this investment during this period which will help you fund the goal.

You are also planning to change your car in four years and the expected cost is Rs. 13 lakh. We are expecting the car cost of the same variant will go up by 6% per annum so the car value at the time of goal date will be at least Rs. 16.50 lakh. Currently, it is difficult to find the entire amount from your existing investment and you do not have a sufficient amount to start a new investment for this goal after allocating surplus amount to other goals. If the existing direct equity investment of Rs. 7.5 lakh grows at 9% p.a. in this period, then the amount will become Rs. 10 lakh in four years. The EMI for shortage amount of Rs. 6.50 lakh will be Rs. 8,500, in five-year term at 10% rate. You may utilise the monthly investment amount for loan repayment.

You should also take a family floater health insurance of Rs. 5 lakh immediately to protect from any unforeseen medical expenses. Also, take term insurance of Rs. 1 crore to meet the living expenses of the family and family-oriented goals even in your absence.

I have not considered Rs. 1 lakh in savings account for any goals. You may utilise this amount for wealth accumulation by investing in equity-related products. Also, you may continue investing even after achieving your goals. This will help you to create wealth in the future.

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