Geojit’s Investment Analyst, Gibin John, helps a couple with their financial planning. He advices them on how they can plan for their child’s higher education, build a corpus to renovate their house and accumulate a corpus for retirement.
I am working for a private firm and my wife has a part time job. I am 33 years of age, my wife is 30 years old and we have a two year old son. My monthly income is Rs.50000 and my wife earns an average of Rs.12000 from her part time job. Our expenses are: family living expenses of Rs.12000, and miscellaneous expenses of Rs.4000. Currently I am investing monthly Rs.5000 in recurring deposits and have accumulated Rs.125000. I am also paying an annual insurance premium of Rs.5032. We have a car loan of Rs 4 lakh which was taken two years ago and its EMI is Rs. 8350. The current outstanding loan amount is Rs. 2.6 lakh.
We are planning to add one more floor to our house within three years and give it on rent. The cost expected for this extension is Rs.12 lakh. Current rent in this area is Rs.8000. I would also like to create a corpus of Rs.7 lakh for my son’s higher education. I am working in a private firm so we will need at least Rs.12000 as pension after retirement. Please guide us in achieving our financial goals.
Gibin John, a certified financial planner replies:
It is a great decision to have a financial plan and allocate investments in proper way. Currently you have few investments which are not sufficient to achieve your financial goals. If you utilise your existing surplus amount properly you can create sufficient corpus for each goal.
Your current total family income is Rs.62000. After deducting expenses and EMI, your investable surplus is Rs.37650. Currently you have only Rs.5000 as investment in recurring deposit (RD). Total invested amount in this RD is Rs.125000, so we assume that you have been investing in this for the last two years. This investment you can continue as emergency fund which you can use during any contingencies in the future. Ideally you have to keep at least an amount equal to six months income as emergency fund. If you continue your RD for next 3 years you can create Rs.3.5 lakh which will be sufficient for your emergency situations.
You are planning to create an amount of Rs.7 lakh for your son’s higher education. You will need this amount for his higher education only after 15 years. At that time the cost of education would be around Rs.22 lakh if the expense is inflated at 8% (This is the current education inflation). For achieving this amount you should invest Rs.5550 every month in equity oriented scheme with an expected 10% return. You have not accounted for the expenses towards your son’s for primary education. Normally you will require at least Rs.60000 for this purpose. That amount you can find from the above mentioned recurring deposit.
We appreciate your far sighted vision for creating a retirement corpus. Many people forget to create retirement corpus, which is most important for a financially secured retirement life, especially for the salaried people. Your expectation of expenses after retirement is Rs.12000 in today’s value. As cost of living goes up every year at the rate of inflation, this amount will become Rs.45836 at the retirement age of 56. For maintaining the same standard of living till wife’s age of 80 (Here we consider wife’s age for retirement planning), you have to create a corpus of Rs.1.31 Crore. If you invest every month Rs.13000 in an investment which yields 10% returns, you can accumulate this corpus. If you target lower returns, they you will have to invest more amount to reach the same value. Also since the goal is long term, we recommend equity oriented mutual fund to accumulate the retirement corpus amount.
Another goal you mentioned is to renovate existing house. Rental income will help you ensure a stable retirement income in future. So your plan to extend your house is a wise decision. For this purpose you are expecting an expence of Rs.12 lakh but this could become Rs.14 lakh after three years, considering the increasing cost of raw materials. This goal is short term in nature and hence there is not enough time to create full corpus through savings. So you have to depend on loan. For accumulating a corpus towards this purpose, you may to invest Rs.10000 from now in debt mutual fund or recurring deposit. We recommend short duration debt funds or RD for this purpose. From this investment you can create a corpus of around Rs. 4 lakh and rest of the amount you can raise though a home loan. You may even get tax benefit on this loan depending on tax rules at that point of time.
You have no sufficient insurance coverage for your life and you are the main earning member in your family. You have the responsibility to ensure that the family’s financial needs are taken care. So you should take a term insurance of minimum Rs 50 lakh which will help your family to fulfil the above dreams even in your absence. Term plans are cheap and play an indispensable role in a person’s financial life. Similarly a health insurance other than employer provided one is essential to meet any unforeseen medical expense. An early family floater health cover plan could be run through the whole life time at lower premiums if started early. Insurance is foremost necessity even before starting investments. Wish you a prosperous life.