Geojit’s Senior Investment Analyst, Gibin John, addresses the financial planning challenges faced by a young couple in their early thirties: balancing current expenses while planning for major life goals. He provides a structured approach to help them create a comprehensive financial roadmap to build a robust corpus for their investment needs.
I am working as an assistant section engineer for a company and my husband is a sales manager, working for a private company. I am 30 years old, while my husband is 31. Our monthly income is Rs. 80,000 and Rs. 95,000 respectively. We are staying in a rented flat and our monthly living expenses are Rs. 30,000, our house rent is Rs. 13,000 and travel expenses are Rs. 10,000 per month. We have a car loan with an EMI of Rs. 9,000 and we have a policy with a premium of Rs. 6,000 paid half yearly. These are our identifiable expenses, but we do not have much savings. We have a bank fixed deposit of Rs. 6.50 lakh. The outstanding car loan amount is Rs. 2 lakh, which will end after two years.
The main intention behind writing to you is to bring financial discipline to our life. We are planning to buy a new flat in three years with an expected cost of Rs. 50 lakh. We also plan to buy another car worth approximately Rs. 15 lakh after repaying the car loan. We are planning to retire at the age of 55. Additionally, we need to accumulate a corpus to achieve goals other than those mentioned here. Please give your valuable advice and suggest suitable investments.
Gibin John, who is also a Certified Financial Planner replies:
Firstly, I appreciate your intention to prepare a financial plan for your life. You both are established in your careers, and hence this decision will help you create wealth and achieve your goals in a timely manner. I am assuming that the income you have mentioned here is your net income. The total family income is Rs. 1,75,000 and the total expenses are Rs. 63,000. That is, only 36% of the income is being utilized for meeting living expenses and other commitments. Balance Rs. 1,12,000 is available for investing. But as you mentioned in your letter, you have not been able to make investments using this surplus amount. The one and only reason is you have not been a disciplined investor. The surplus is likely being spent on non-essential items.
Even before you start investing for your goals, you must set up a contingency fund for meeting any emergency situations in life. For this purpose, you may earmark Rs. 4 lakh from your existing fixed deposit of Rs. 6.5 lakh. This amount will be sufficient to meet expenses and obligations for 6 months.
Your immediate goal is to buy a new flat in three years. The expected cost for this goal is Rs. 50 lakh. If this cost is inflated at 6%, then the cost of the flat will increase to Rs. 60 lakh. It is difficult to accumulate this amount in such a short period by using your existing surplus. So, you need to take a home loan to fill the shortage. This is a short-term goal, and hence you should not take too much risk in your investments. You may invest the amount in low-risk investments like high rated debt mutual funds or recurring deposits. Assuming these investments fetch 7 % return per annum, and you invest Rs. 1,00,000 per month, then you can create a corpus of Rs. 40 lakh in three years. For the balance Rs. 20 lakh, you may take a home loan for twenty years and the monthly EMI for this loan will be around Rs. 18,000.
Your next goal is to buy a new car after three years at an expected cost of Rs. 15 lakh. This goal is also short-term in nature and the goal dates for both goals are the same. If you are planning to purchase a car in the same period, then the total liability will also increase. So, we suggest you extend the goal date by another year, which will allow you time to accumulate the goal amount. The cost of the car may increase to Rs. 20 lakh due to inflation. You may invest Rs. 10,000 in high rated debt mutual fund or recurring deposit and also set aside Rs. 1.50 lakh from your existing fixed deposit. If this amount fetches a return of 7% per annum, then the amount will become Rs. 7.50 lakh. After purchasing your flat, the Rs. 1 lakh you invested towards this goal will be free and you may utilize this amount for your car purchase. You can accumulate Rs. 12.50 lakhs from this investment.
Another important goal is your retirement plan. For maintaining your existing standard of living even after retirement, you need to accumulate a substantial corpus. The current living expense of Rs. 30,000 would become Rs. 1,21,468 at the age of 55, if the expenses are inflated at the rate of 6%. To accumulate the inflation adjusted amount which will last you from retirement till the age of 80, you need to create a corpus of Rs. 3.25 crore. For accumulating this amount within the next 20 years (after the car goal), you need to invest Rs. 35,500 per month in equity oriented mutual funds with an expected average rate of return of 12%.
You have not mentioned health insurance or life insurance in your letter. You will need health insurance coverage for a minimum of Rs. 5 lakh. If your companies are providing this coverage, then that will be enough; otherwise, you should purchase a health insurance policy. Later, if there is a change in your dependents, you both may consider buying term insurance of Rs. 1 crore each. However, if you take term insurance now, the premium will be less considering your current age.
The above proposals are based on your existing surplus amount. Once the loan repayment for your home and car purchase is over, you will have sufficient surplus to invest towards any other goals in future or invest towards creating wealth. We advise you to review your investments and check your progress every six months.
