Geojit’s Investment Analyst, Gibin John, helps a couple in their 30s create a comprehensive financial roadmap to build a robust corpus to expand their business and accumulate Rs.10 lakh for their son’s higher education.
My name is Raju, 35 years old and my wife is 33 years old. Our professional journey began in private companies, and we have successfully transitioned to being entrepreneurs. We have a 6-year-old son who is studying in 1st standard. Currently, I actively trade in stocks and invest in mutual funds. Our average monthly income after all expenses is Rs. 1,00,000, monthly living expenses are Rs. 45,000, and additional monthly expenses amount to around Rs. 15,000.
The most challenging part is the monthly income variation, making it difficult to manage our investments properly. We are writing this email to seek your valuable suggestions and guidance on how to manage our finances effectively. Currently, I hold shares worth Rs. 5 lakh and mutual funds worth Rs. 2 lakh. Additionally, my bank savings account balance is Rs. 3 lakh. We reside in our own flat, and I have an LIC policy with a sum assured of Rs. 5 lakh, which will mature in March 2026.
We are planning to expand our business within the next five years, with an estimated cost of Rs. 15 lakh. Additionally, we will need Rs. 10 lakh for our son’s higher education. I also plan to replace my car after five years, with an expected cost of Rs. 15 lakh. Since I intend to continue my business throughout my life, I do not see the need to plan for retirement.
Please guide us on how to manage our investments and achieve our goals on time.
Gibin John, a Certified Financial Planner replies:
A well-prepared and properly implemented financial plan can help individuals achieve all realistic life goals. You may already have a structured plan for your business, where every decision is based on a core strategy. Similarly, it is equally important to have a financial plan for your personal finances.
In your case, since your business income is irregular, managing monthly investments can be challenging. Instead, opting for quarterly investments can help you manage your finances more effectively without unnecessary stress. Your average monthly income is Rs. 1 lakh, while your expenses amount to Rs. 60,000, leaving an average surplus of Rs. 40,000 available for investment.
First, you need to set aside a contingency fund to help you manage any unforeseen situations in your personal life. Typically, the recommended size of a contingency fund should be at least three to six times your monthly expenses. We suggest earmarking your existing savings account balance of Rs. 3 lakh as an emergency fund.
This fund is meant for personal emergencies, and for business-related contingencies, you should create a separate reserve. We hope you already have sufficient balance in your business account to cover emergency situations or working capital requirements.
You are planning to expand your business in five years, with an estimated cost of Rs. 15 lakh. Since the future cash flow of your business will depend on this expansion, it should be considered your primary financial goal. As you have already fixed the budget for this expansion, we are not factoring in inflation for this cost.
To accumulate this amount, we recommend investing Rs. 65,000 every quarter (equivalent to Rs. 21,667 per month) in a debt mutual fund, which has the potential to generate higher returns than a bank recurring deposit. Additionally, we suggest checking with relevant authorities for any government schemes that provide financial support for business expansion. If such schemes are available, leveraging them can help you achieve your goal with less financial strain.
Your next financial goal is your son’s higher education. You estimate the cost to be Rs. 10 lakh. However, considering an 8% annual inflation rate, this cost willrise to approximately Rs. 23.32 lakh in 11 years when he begins his higher education. Since this is a long[1]term goal, we recommend investing Rs. 31,500 every quarter (an average of Rs. 10,500 per month) in equity[1]oriented mutual funds. We anticipate a 9% annual return on this investment, which should help you accumulate the required amount to fund his education.
You are also planning to upgrade your car in five years, with an estimated cost of Rs. 15 lakh. However, considering a 6% annual increase in car prices, the cost of the same variant is expected to rise to at least Rs. 20 lakh by the time of purchase.
Currently, allocating additional investments for this goal may not be feasible after prioritizing your business expansion and your son’s education. Instead, you can optimize your existing investments to meet this requirement. If your current direct equity investment of Rs. 5 lakh grows at an expected 9% annual return, it will reach approximately Rs. 7.69 lakh in five years. Additionally, you can use the maturity amount from your LIC policy, which provides Rs. 5 lakh (sum assured considered), bringing the total available funds to Rs. 12.69 lakh.
To cover the remaining Rs. 7.31 lakh, you may need to opt for a car loan at that time. Assuming a 10% interest rate for a five-year tenure, the estimated EMI would be Rs. 15,600 per month. Since your business expansion goal would have been realized by then, you can redirect the funds previously allocated for that goal toward repaying the car loan.
You have mentioned in your letter that you do not wish to plan for retirement. However, we strongly recommend that you start saving for this purpose five years from now. It is important not to rely solely on one source of income throughout life. Even before or after retirement, having multiple income streams ensures financial security and stability. Additionally, we advise you to take a family floater health insurance policy of Rs. 5 lakh immediately to safeguard against unforeseen medical expenses. You should also consider a term insurance policy of Rs. 1 crore to ensure that your family’s living expenses, and financial goals are protected in your absence.
