Geojit’s Certified Financial Planner, Gibin John, offers guidance to a young couple to plan for their future. He analyses their income, expenses and suggests investment options to achieve their financial goals such as buying a new flat, car and retirement.
My husband is an engineer and works for a private company, while I am an accountant. I am 30 years old, and he is 31 years old. Our monthly incomes are Rs. 70,000 and Rs. 1,25,000, respectively. We are living in a rented flat. Our monthly living expenses are approximately Rs. 35,000, rent is Rs. 15,000, and the car loan EMI is Rs. 12,500. We also pay an LIC premium of Rs. 5,000 every six months. We do not have a lot of savings, only a bank fixed deposit of Rs. 5 lakh. The outstanding car loan amount is Rs. 2.70 lakh, which will be fully repaid in two years.
We plan to buy a new flat within the next three years, valued at around Rs. 70 lakh, for which, our parents have agreed to contribute Rs. 20 lakh. We also plan to buy a new car after the completion of our current car loan. The expected cost of the new car is between Rs. 13 lakh and Rs. 15 lakh. Our goal is to retire at the age of 55 with sufficient funds for any other future plans or goals.
We would appreciate your valuable advice and recommendations regarding suitable investment options and a financial plan to help us achieve these goals.
Gibin John, our Certified Financial Planner, replies:
Firstly, I appreciate your intention to prepare a financial plan for your life. Most people tend to overlook financial planning and fail to manage their finances systematically. Since both of you are at the early stage of your careers, this decision will help you build wealth and achieve your financial goals on time.
I am assuming that the income figures mentioned are your net monthly incomes. The total monthly income of your family is Rs. 1,95,000, while your total identified monthly expenses amount to Rs. 62,500. This means that approximately 32% of your income is being utilized for living expenses and existing financial commitments. The remaining 68%, which is approximately Rs. 1,32,500 per month, can potentially be used for wealth creation and achieving your future financial goals. However, as you mentioned in your letter, you have not been able to create significant investments despite having this surplus. The primary reason appears to be a lack of disciplined investing. As a result, a considerable portion of this surplus may be spent on miscellaneous or unplanned expenses without contributing to your long-term financial objectives.
Before starting goal-based financial planning, you should establish a contingency fund to meet any unforeseen emergencies. For this purpose, you may set aside Rs. 3 lakh from your existing fixed deposit as an emergency fund. This amount should be sufficient to cover approximately five months of your essential living expenses and financial obligations. The fund should be kept in a safe and easily accessible investment avenue, such as a savings account, sweep-in account, or a short-term fixed deposit, so that it can be withdrawn immediately whenever an emergency arises.
Having an adequate contingency fund will ensure that unexpected events, such as a medical emergency, temporary loss of income, or urgent financial requirements, do not disrupt your long-term financial goals and investment plans.
Your immediate goal is to purchase a new flat within the next three years. The current estimated cost of the flat is Rs. 70 lakh. Assuming an annual inflation rate of 6%, the cost is likely to increase to approximately Rs. 84 lakh by the time you plan to make the purchase.
Your parents have agreed to contribute Rs. 20 lakh towards this goal, which will significantly support your dream of owning a home. This means that you will need to arrange the remaining Rs. 64 lakh on your own. Accumulating the entire amount within three years may not be possible. Therefore, you will need to rely partly on a home loan. If you invest Rs. 75000 per month towards this goal for the next 36 months and earn an average return of 6% per annum, you can accumulate approximately Rs. 29 lakh by the end of the investment period. Combined with your parents’ contribution of Rs. 20 lakh, you will have around Rs. 49 lakh available for the purchase. The remaining Rs. 35 lakh can be financed through a home loan with a tenure of 15 years. The EMI for such a loan would be approximately Rs. 34,000 per month, depending on the prevailing interest rate. However, if you repay Rs. 50,000 per month towards the loan instead of the regular EMI, you can significantly reduce the loan tenure and potentially close the loan within about 8 years, while also saving a substantial amount on interest.
Your next goal is to purchase a new car in three years, with an expected cost of Rs. 13 lakh to Rs. 15 lakh. Based on this, you should aim to accumulate approximately Rs. 14 lakh. If the cost of the new car exceeds this amount, the additional requirement can be met from the proceeds of selling your existing car. Since this is a short-term goal, it is advisable to invest Rs. 35,000 per month in a debt mutual fund or a recurring deposit (RD) to build the required corpus within the target timeframe.
Another important goal is retirement planning. To maintain your current standard of living after retirement, you need to accumulate a sufficient retirement corpus. Your current monthly expense of Rs. 35,000 is expected to increase to approximately Rs. 1,41,712 per month by the time you reach the age of 55, assuming an inflation rate of 6% per annum. To generate this inflation-adjusted income until the age of 80, you would need to build a retirement corpus of approximately Rs. 3.80 crore. To accumulate this corpus over the next 26 years, you should invest approximately Rs. 25,500 per month in equity-oriented mutual funds, assuming an average annual return of 12%. This disciplined investment approach can help you achieve your retirement goal and maintain financial independence throughout your retirement years.
You have not mentioned health insurance and life insurance in your letter. You should have health insurance coverage of at least Rs. 5 lakh. If your employer already provides health insurance with this level of coverage, that would be sufficient. Otherwise, I recommend purchasing an individual health insurance policy. Since both of you are currently employed and do not have any dependents, there is no immediate need to purchase life insurance. However, if your dependent status changes (for example, having children, taking on financial responsibilities, etc.), both of you should consider purchasing term life insurance of at least Rs. 50 lakh each. If you choose to buy term insurance now, the premium is likely to be lower because of your current age, allowing you to lock in a more affordable rate for the future.
