Geojit’s Investment Analyst, Gibin John, replies to an accounts manager on how to plan and achieve his goals, he is also looking for advise on early repayment of loans.
I am 32 years old, working as an accounts manager at a private company. My father died 15 years ago and I have with me my mother, wife and a two-year-old son. The money earned so far has been used to a build house and clear other debts. Now I am getting a net monthly take home salary of Rs 50,000 and my wife also works for a company and earns Rs 30,000.
- A Home loan of Rs 20 lakh taken in February 2018 for 20 years at 8.9 % interest rate. EMI is Rs. 17890.
- An outstanding amount of Rs. 3 lakh on the car loan and Rs. 6550 is paid monthly towards this loan. The loan was taken for a period of seven years in 2017.
- Travelling expenses Rs.4000 per month
- Living expenses Rs.25000 per month
- An outstanding amount of Rs.57000 on a personal loan taken in 2017. EMI is 5200 per month. One more year to expire.
A fixed deposit of Rs 1, 60,000 will mature next month.
- Pay off the housing loan in the next 10 years.
- Pay off the car loan in three years.
- Create a corpus of Rs. 20 lakh for son’s education in 15 years.
- I am planning to retire at the age of 55. Kindly advise me on to how to raise the required amount for post-retirement life.
I request you to please advise me on how I can achieve these goals and please do not disclose my name.
Gibin John, a certified financial planner replies:
From the given information, it is understood that you are over depending on loans to fulfil your life goals. Increasing loan repayments will only decrease your opportunities to create wealth. Your current total income, including your wife’s salary, is Rs.80,000. After deducting your monthly living expenses and loan repayments from the total income we arrive at a surplus amount of Rs.21,000. Let us see how you can create a corpus to fulfil your dreams by using this surplus amount.
Assuming you have not set aside sufficient liquid money to meet your contingency requirements you should first create an emergency fund for probable emergency unavoidable cash outflows. For this purpose you have to set aside a minimum amount of Rs. 1 lakh for which you can utilize the money from your existing fixed deposit which will mature next month.
The balance amount payable towards the existing personal loan is Rs.57000. It is better to close this personal loan which has a higher interest rate when compared to other loans. For closing this loan you can use the balance amount of your maturing fixed deposit. After closing this loan, the EMI amount of Rs.5200 towards this loan can be used to create a corpus for other life goals.
Your most important goal we assume is to raise Rs.20 lakh over the next 15 years for your son’s education. Investing regularly in mutual funds is the most prudent way of saving for such long-term goals. Assuming a rate of returnof 12 % on your investment, you need to invest Rs.4200 every month for creating this amount.
Now let’s see how to repay the car loan early. You are planning to completely settle the car loan balance of Rs.3 lakh within the next three years. During this period there will be a monthly repayment towards the loan and hence after three years the loan repayment balance will come down to around Rs.1,45,000. For repaying this amount you can invest Rs.3700 every month for next three years in less risky instruments like debt mutual funds or bank recurring deposits. After repaying this car loan you will have an investable surplus of Rs.10250 (i.e. EMI amount of Rs.6550 and the additional investment of Rs.3700 which you were investing to create the corpus for early repayment of loan) which could be used for investment to achieve other life goals.
Your next aim is to repay your home loan in next ten years. You took this loan for 20 years. By paying off the loan early using a higher EMI, you will get the benefit of less overall interest payment but you may have less surplus to face any contingency situation and you might end up relying on other loans with higher interest rate ( other than your home loan) in the event of an emergency. For repaying the loan in 10 years you should ideally repay Rs.6500 every month (towards the principal) along with the EMI amount if the bank allows you to do so. Or else another option is to start a recurring deposit of Rs.6500 and make an additional payment annually with the proceeds of the deposit.
You know that our living expenses are on the rise every year. When you retire at the age of 55, at an inflation rate of 6%, today’s living expense of Rs.25000 will become Rs.95500. Assuming you live till 80 years, you will have to provide for the next 25 years after retirement (as you want to retire at 55 years) and for this you will have to create a corpus of Rs.2.30 crore. To accumulate this corpus in your working years you should start today with a monthly investment of at least Rs.17500. Currently your investable surplus is not sufficient to fund this goal. But as discussed earlier, you will have an investable surplus of Rs.10250 in three years’ time, after the repayment of your car loan which you can use for investment towards retirement corpus. Considering this cushion, you could start your current investment with Rs. 11000 which is currently within your available surplus.
A breadwinner has huge responsibility towards his family. Hence even in your absence, for fulfilling your dreams you should take a minimum term life insurance of Rs.75 lakh. Also take a family floater medical insurance with minimum coverage of Rs.5 lakh which will protect your family from medical expenses which may arise in future.