Geojit’s Investment Analyst, Gibin John, helps a couple with their financial planning. He advices them on how they can build a corpus to build a house and plan for their child’s higher education and retirement.
I am working in a private firm and my wife also is working in the same company. I am 35, my wife is 29 and we have a two year old daughter. Our family’s monthly income is Rs.73,000. Our expenses are – house rent Rs.8000, family living expenses Rs.10000 and day care and other expenses for our daughter Rs.6000. Currently I am investing monthly Rs.10000 in recurring deposits and Rs.7000 in mutual fund SIP. This SIP investment was started recently. I am also paying quarterly insurance premium of Rs.1932. We have Rs.3 lakh fixed deposit in a bank and we have an outstanding car loan of Rs. 1 lakh and Rs.50,000 loan on bike and its EMI is Rs.8000. This is our current family financial situation.
We are planning to build a house or buy a flat worth Rs.60 lakh within next three years. How much loan we will have to take for this ? Also advise on how to allocate our investments.
Gibin John, a certified financial planner replies:
Glad to note that you are keeping aside a portion of your monthly income for investments. However, you will have to make some necessary modifications in terms of the amount and the type of investments, in order to achieve your goals.
You are left with an investable surplus of Rs. 40,517, after deducting monthly expenses and repayment towards loans, from the total monthly income of Rs. 73,000. You can achieve all your goals by prudently investing this surplus amount. We will discuss how this has to be done.
You had mentioned buying a house as your only goal, while some other important goals such as your daughter’s education, her wedding and your retirement also need to be taken into account. The earlier you start, lesser will be the amount you need to invest for these goals. So you need to start investing immediately, for these unplanned goals as well, to achieve all your life goals with the lowest investment.
We understand that you want to buy a house worth Rs. 60 lakhs with in next three years. Since you do not have sufficient investments at present, you will have to rely on home loan to fund your purchase/construction. Home loan for even 80% of the required amount is Rs. 48 lakhs. The EMI for the same will be approximately Rs. 43,000, which is 58% of your current total income. In such a scenario you won’t be able to consider your other goals such as your daughter’s education, her wedding, your retirement etc.
So we would advise you to postpone this goal for another two years. You will have to invest monthly Rs.30,000 from now onwards towards this goal. You can divert your current RD investment of Rs. 10,000 along with this we propose you invest Rs.20000 in a debt mutual fund for this goal. Estimating an annual return of 7%, this investment will fetch approximately Rs.21 lakhs within the next five years. You may take a home loan for the balance fund required (which is Rs.39 lakh). The EMI on this would be Rs.36500 for a term of 18 years. But even this would be a huge percentage when compared to your monthly income. On a positive note, this will be affordable if your income grows by 20% in the next five years.
But if your income remains the same, you may have to bring down the budget for the house to Rs 50. lakh. In that case you loan requirement will come down to Rs.29 lakh and the corresponding EMI would be Rs.27000.
Now let’s discuss other goals. Education of your daughter is important to make her financially independent. Assuming an expense of Rs 5 lakh in current terms, with an education inflation rate of 8%, the cost will become Rs. 16 Lakh after 15 years. You need to invest Rs. 3,500 monthly in an equity oriented Mutual Fund to achieve this goal. Similarly for your daughter’s wedding, at current expense of Rs 10 lakhs, will become Rs.36 lakhs in 22 years at an estimated inflation of 6%. You need to invest monthly Rs 3,000 in an equity oriented Mutual Fund starting immediately to achieve this goal. You are already investing Rs. 7000 monthly in SIPs, which could be assigned towards both these goals.
Equally important is to start investing immediately for your financially secured retired life. Your current monthly expense of Rs. 10,000 will become Rs. 38,197 by the time you retire age of 58 at an estimated inflation of 6%. You will require a corpus of Rs. 1 cr in order to fund your retirement life, which will be sufficient to maintain the same standard of living till your wife reaches the age of 80. You are required to invest Rs. 7,500 in an equity oriented Mutual Fund to accumulate the retirement corpus. We recommend equity oriented schemes for longer term goals and fixed return investments for short term goals like accumulation of money for home loan down payment.
Bank Deposits returns are low at present. You may pay off your loan from the existing Bank FD of Rs. 3 lakhs. The EMI you are paying towards this loan can be allocated for creating corpus for your retirement goals.