Geojit’s Investment Analyst, Gibin John, helps a young couple working in the private sector plan for their life goals, which include saving for their son’s higher education, retirement planning and early closure of
home loan. Gibin John analyses the client’s current investments to help them invest and plan ahead for life.
I am 33 years old and my wife is 32. We have a 5-yearold son. My monthly income is Rs. 1,10,000 and my wife’s monthly salary is Rs. 60,000. Our living expense is Rs. 45,000. Last year, we purchased a flat worth Rs. 75 lakh. I have taken a home loan of Rs. 40 lakh (interest rate 9.5%) for purchasing this flat and the EMI for this loan is Rs. 37,500 for 20 years. I have been depositing Rs. 12,000 in an RD for the past year. I have Rs. 1.75 lakh in my savings account. Please advise me on how to close the loan at
the earliest since I do not intend to prolong this debt for an extended period. Additionally, we
want to accumulate Rs. 25 lakh for our son’s higher education. I plan to retire at the age of 55 and our expected monthly living expense is Rs. 30,000. My employer offers health insurance
to my family.
Gibin John, a Certified Financial Planner replies:
You are young and have 22 years of professional life left. So, it is an appropriate time to begin financial planning and make plan-based structured investments. Although you did not specify your investment details in your letter, we are assuming that the money you saved up in prior years was
utilized to buy the flat. Your wife makes Rs. 60,000 per month, whereas your current salary is Rs. 1,10,000 per month. Your monthly living expense is Rs. 45,000 and EMI is Rs. 37,500. The total outflow is Rs. 82,500 and the investable surplus is Rs. 87,500.
Firstly, you have to create an amount as an emergency fund. This sum can be used to cover the need in case of emergencies in the future without depleting your savings. To create an emergency fund, we suggest you set aside a of minimum three months’ expenses and in your case, this can be achieved by setting aside Rs. 1,75,000 from your savings account.
One of your goals is to accumulate a corpus of Rs. 25 lakh for your son’s higher education. If education inflation is considered at 8%, the cost of his higher education would rise to Rs. 63 lakh after 12 years. To accumulate this amount in the next 12 years you must invest Rs. 20,500 per month in equity-related investments. The assumed return from this investment is 12%.
You intend to retire when you turn 55, that is 22 years from now. You have not considered inflation when you arrived at a living expense of Rs. 30,000. So, this amount will not be sufficient to maintain the current standard of living. If we consider an inflation of 6% annually, the anticipated cost
of living might rise to Rs. 1,08,106. To get this inflation adjusted amount during the post-retirement period, till 80 years, you need to create a corpus of Rs. 2.90 crores at the time of retirement. To accumulate this amount in the next 22 years, you have to invest Rs. 25,500 per month in
equity-oriented mutual fund.
Another important goal is the early closing of home loan. You took this 20-year loan one year ago. This loan tenure is very long. The loan was for Rs. 40 lakh, with a current outstanding amount of around Rs. 39.23 lakh. The interest rate of 9.5% you mentioned in the letter may be at the time of the loan sanction date. A loan is always a burden; therefore, it is better to close this loan at the earliest. If the
bank does not allow you to pay an additional amount every month, you may have to pool a certain amount every month and repay the additional amount every year. If you save Rs. 20,000 every month and pay Rs. 2,40,000 every year then you can close the loan in the next 9 years. After allocating this amount towards additional payment of the loan repayment, you still have a surplus. So, you may allocate up to Rs. 30,000 towards additional loan repayment. If you do so then the loan will end in 6th year.
