Geojit’s Investment Analyst, Gibin John, helps a couple with financial planning. They want advice on how to manage their liabilities and achieve their goals like buying a car, accumulating a corpus for their child’s higher education, and retirement.
Q: I am 34-year old, working in a private firm. My family consists of wife (31) and a son (5). My son is studying in 1st standard. My monthly salary is Rs.75,000 and my wife earns Rs.55,000. Currently, we are staying in our own house, which was built 2 years back. We had taken a home loan of Rs.40 lakh at 8.5percent interest and we are paying Rs.35,000 as EMI. The loan tenure is 20 years. Our monthly living expense is Rs.38,000 including kid’s education fees. We are currently investing Rs.10,000 in RD and Rs.8,000 in mutual funds on a monthly basis. My savings account balance is Rs.2,00,000. The current property value is approximately Rs. 90 lakhs.
We plan to buy a car worth Rs. 15 lakh in the next four years and expect our son’s higher education to cost to be around Rs. 10 lakh. We have set our retirement age at 55. After retirement, we may have living expenses around Rs.25,000 per month. I would like to know how I can close my housing loan early and how to better manage my liabilities and achieve my goals. Kindly advice.
Gibin John, a certified financial planner replies:
A: Feels good to see that you have decided to plan for your goals and have started investing accordingly, especially for your post-retirement life. Analysing your profile, we learned that currently, you have not done enough investments. You might have utilised your investments which you did earlier, for the construction of the house. Your existing investment of Rs 2 lakh in the savings bank account can be earmarked as an emergency fund. This amount can be used for unpredictable expenses which may incur in the future.
Your total income is Rs.1,30,000and total outflow for meeting living expenses and obligations is Rs.73,000.The net surplus available for investment is Rs. 57,000.
Though you have mentioned that closing the home loan is your priority, we are looking at how to create a corpus for your son’s education firstly. You expect this to cost you Rs.10 lakhs. Considering education inflation of 8percent, the higher education cost will become Rs.25 lakh when he turns 17years old, and to achieve this goal you can invest Rs. 6,300per month in an equity-oriented mutual fund. Secondly, for buying a car after 4 years you will require Rs. 19 lakh. For accumulating this amount, you have to invest Rs. 35,000 per month in RD or debt-oriented mutual fund.
Your next and important goal is retirement. You are planning to retire at the age of 55 and you are expecting Rs.25,000 as a post-retirement expense. After 21 years at the time of retirement, this monthly cost will become Rs. 85,000 due to inflation. For meeting this inflation-adjusted expense during the post-retirement period till the age of 80, you will have to create a corpus of Rs.2.27 crore by the time you retire. To create this corpus within 21 years, you will have to invest Rs.32,000 per month till retirement in an equity-oriented mutual fund. Currently, you do not have sufficient funds to invest the full amount, so you may start with Rs. 15,000 and after four years, after buying the car, you may add another Rs. 26,000 to the investment towards retirement.
Your main concern is the closure of the home loan. For the purpose of early closing of the loan, you have to pay an additional amount towards the principal. At this point, after considering all goals, you do not have sufficient funds for additional payment. If you repay an additional amount of Rs. 1 lakh every year then the loan will end within the next 12 years. Moreover, the loan interest rates have come down from 8.5percent and now they are at 7percent levels. If you are paying the same EMI then your tenure would have reduced considerably. Now, if you reduce the car value to Rs. 14 lakh, then you will able to save Rs. 8,500 per month for additional loan repayment of Rs. 1 lakh per year. This will again reduce the loan tenure further.
You did not mention the holding value of the current mutual fund SIP and RD. So, we are not considering this value for our calculation. You may use this amount towards fulfilling any goal or loan repayment. Use equity mutual funds for long-term goals and debt investments for short-term ones.