Geojit’s Certified Financial Planner, Gibin John, offers guidance to a young couple with a 3-year-old child to plan for their future. He analyses their income, expenses and suggests investment options to achieve their financial goals such as planning for their son’s higher education and their retirement.
I am 32 years old, and my wife is 28 years old. We have a 3-year-old son. Both of us are working for private firms. My monthly income is Rs. 1,25,000, and her monthly income is Rs. 1,00,000. Our parents manage their own expenses from their business income. Our monthly living expense is Rs. 60,000. Last year, we purchased a flat worth Rs. 80 lakh. I have taken a home loan of Rs. 45 lakh at an interest rate of 9.00%, and the EMI for this loan is Rs. 41000 for 20 years. Currently, I am doing an SIP of Rs. 15,000.
I would like to understand how I can close this loan as early as possible, as I do not wish to continue it for the full tenure. I also want to create a corpus for my son’s higher education when he turns 17, with an expected cost of Rs. 30 lakh. Additionally, I am planning to retire at the age of 55, and we will require Rs. 60,000 per month after retirement to meet our living expenses. I have company-provided health insurance that covers my entire family.
Gibin John, our Certified Financial Planner, replies: You both are young, and you still have around 23 years of your career left. Therefore, this is the right time to create a financial plan and start structured investments based on that plan.
Your total family income is Rs. 2,25,000 per month. The cash outflows from this income include living expenses of Rs. 60,000 per month and a home loan EMI of Rs. 41,000. The total outflow is Rs. 1,01,000, leaving a balance of Rs. 1,24,000.
Firstly, you need to create an emergency fund. In case any contingencies arise in the future, you can utilize this amount. Ideally, a minimum of three to six month expenses and obligations should be set aside for this purpose. In your case, you need to set aside a minimum of Rs. 3 lakh for this purpose. You have not mentioned any existing savings. If there are no savings, then this amount needs to be accumulated over the next three months.
One of your major goals is your son’s higher education. Your expected cost for this goal is Rs. 30 lakh. Considering an education inflation rate of 8%, the cost of this goal after 14 years—when he reaches the age for higher education—may increase to approximately Rs. 88 lakh.
To accumulate this amount over the next 14 years, you need to invest around Rs. 21,500 per month in equity related investments. The assumed rate of return for this investment is 12% p.a.
In your retirement plan, you are expecting a living cost of Rs. 60,000 per month in today’s value. You plan to retire at the age of 55, which gives you 23 years to accumulate your retirement corpus. If we assume an inflation rate of 6% per year, this monthly living cost will grow to approximately Rs. 2.30 lakh per month by the time you retire.
To generate this inflation-adjusted income from retirement until the age of 80, you will need a retirement corpus of around Rs. 6.15 crore at the time of retirement. To accumulate this amount over the next 25 years, you need to invest approximately Rs. 46,000 per month in equity-oriented mutual funds.
Your retirement period and the remaining working period are the same, giving you sufficient time to build the required corpus through disciplined investing.
Another important requirement for you is the early closure of your home loan. You took this loan one year ago with a tenure of 20 years, which is quite long. The initial loan amount was Rs. 45 lakh, and the current outstanding is around Rs. 44 lakh. The interest rate of 9% mentioned in your letter may be the rate at the time of loan sanction. Many people prefer to close long-term loans early, and although interest rates have reduced recently, we are considering the same 9% rate for calculation purposes.
A long-term loan creates a significant burden and may also act as an obstacle to other investment opportunities. Therefore, it is advisable to close the loan as early as possible. Since the bank may not allow you to make additional payments every month, you will need to save a fixed amount monthly and make one lumpsum part payment every year.
If you save Rs. 10,000 every month and make a lumpsum repayment of Rs. 1,20,000 every year, you will be able to close the loan in approximately 12 years. If you double this monthly savings amount and repay Rs. 2,40,000 annually, you will be able to close the loan in about 9 years.
After completing these goals, you will still have a surplus amount available for investment. You should continue investing this surplus to accumulate an additional corpus. This can be utilised for future goals such as purchasing a car, planning vacations, or any other lifestyle requirements.
