Gibin John, Financial Planner in STEPS helps a young couple with their financial planning. He advices them on how they can plan for their child’s higher education, expand their existing business, buy a car and accumulate a corpus for retirement.
My name is Deepesh and I am 35 years old and my wife is 33. We have a son, aged 6 and he is studying in 1 st standard. Currently I am doing business and my wife is also helping in the business. We were working for a private company before marriage after that we started a business and it is going well. I am a regular stock trader and I have mutual fund investments too. Currently my average monthly income is ₹1,00,000 after all expenses. Our monthly living expense is ₹45000. Other expenses are around ₹15,000 per month.
Our income varies every month hence we are not able to manage our investments properly. We seek your valuable suggestion and guidance on how to manage our money. Now I have a share holding of ₹5 lakh and mutual funds worth ₹2 lakh. Also my bank saving account balance is ₹ 3,00,000. We are residing in our own flat. I have an LIC policy and the sum assured is ₹5 lakh and it will mature in March 2024.
We are planning to expand our business within five years and expected cost for this is ₹ 15 lakh. We need ₹10 lakh for our son’s higher education. I want to change my car after five years and expected cost is ₹15 lakh. I am planning to continue my business and so there no need to plan for retirement.
Please guide us how to manage our investments and achieve our goals on time.
Gibin JohnCFP CM , replies:
A well prepared and implemented financial plan can help any individual achieve all realistic goals in life. You might have already prepared a proper plan for your business. All the decisions you take will be based on this core business plan. Likewise it is important to prepare a financial plan for your personal finance also. In your case the business income cash flow will be irregular so it is difficult to manage monthly investments. If you make your investment on a quarterly basis then you can easily manage your investments without any undue stress. Your monthly average income is ₹1 lakh and expense is ₹60,000. The average surplus amount available for investment is ₹40,000.
Firstly, you have to set aside a contingency fund. This will help you to overcome any unforeseen situation in the personal life. Normally the contingency fund has to be at least three to six times of your monthly expenses. We recommend you to earmark the existing savings account balance of ₹3 lakh as an emergency fund. This is the emergency fund for your personal life and for business requirement you should create another emergency fund. Hope you already have sufficient balance in your business account to meet the emergency situations or working capital requirements.
You are planning to expand your business in five years and expecting a cost of ₹15 lakh. This will be your main goal since the future cash flow from the business will be based on this development in the business. You have already fixed the budget for expansion so we are not considering the inflation on this cost. For creating this amount you should invest ₹65,000 every quarter (the monthly average will be ₹21,667) in a debt mutual fund which has the capability to create more return than the bank recurring deposit. You may also enquire with concerned authorities on government schemes that provide financial help for your business. If it is available you can utilise this to achieve your goal with lesser burden on your finances.
Your next goal is your son’s higher education. You are expecting ₹10 lakh to be the education cost. If the education cost is inflated at 8% then this cost will become ₹23.32 lakh after 11 years, at the time of his higher education. To achieve this goal you have a long duration so you can invest ₹ 31,500 every quarter (monthly average of ₹10,500) in equity oriented mutual funds. We were expecting 9% return from this investment during this period which will help you fund this goal.
You are also planning to change your car in five years and the expected cost is ₹15 lakh. Cost of the same variant car will increase by 6% per annum, so the value of the car at that time will be at least ₹20 lakh. It is difficult to find the entire amount from your existing investment and you will not have sufficient amount to start new investment for this goal after allocating existing surplus amount to other goals. If the existing direct equity investment of ₹5 lakh grows at 9% in this period then the amount will become ₹7.69 in five years. Along with this amount you can utilise the insurance maturity amount of ₹5,00,000 (only sum assured considered here) for this goal. For finding the balance amount for this goal you will have to depend on a car loan at that time. The EMI for the loan amount of ₹7.31 lakh will be ₹15,600, in five year term at 10% rate. You can utilise the amount which was set aside for the business goal to pay this EMI since your business goal would have materialized by then.
You have mentioned in the letter that you don’t want to plan for your retirement. But we strongly recommend you to start saving some amount for this purpose starting five years from now. This is because, one should not depend on just one income in life. Even after or before retirement, one should always ensure more than one stream of income. You should also take a family floater health insurance of ₹5 lakh immediately to protect from the any unforeseen medical expenses. Also take a term insurance of ₹1 crore to meet the living expenses of the family and family oriented goals even in your absence.