The right math for a prosperous future

While a major part of our life is devoted to earning a living, prudent financial planning will ensure that the money earned is appropriately conserved, earmarked and spread over the time span of one’s needs.

To some, financial planning may sound esoteric. However, it is nothing but arranging your finances in light of your future goals. A goal-oriented approach almost certainly ensures that you achieve your objectives without having to compromise on your standard of living. Therefore, the first thing to do is to put everything down on paper, in terms of cold numbers.

Let’s take the example of a typical family to see how financial planning can help them meet their objectives. This is the case of the Mehta family.

Mr and Mrs Mehta are in their mid thirties and are the proud parents of a lovely three-year-old daughter named Pari. They have a combined income of Rs1 lakh a month. After catering for household and other expenses as also the EMI for their house, they together manage to save around Rs26,000 per month.

Mrs Mehta has Rs6 lakh in her PPF account which is maturing in August 2011 and the couple had some miscellaneous post office investments and fixed deposits amounting to Rs5 lakh. They have never bought shares directly but have a portfolio of mutual funds amounting to Rs3.40 lakh.

They also have a running SIP (systematic investment plan) of Rs5,000. Lastly their combined provident fund balance is Rs11.50 lakh with the monthly PF deduction being around Rs10,000 per month. Given this background, their key goals are to provide for the education and marriage of their daughter. They also want to buy a sedan car for the family worth Rs8 lakh. Of course, last but not the least on the agenda is providing for retirement.

Given this information, let’s try and help the Mehtas meet their
financial goals.

Pari’s education
Since the first and foremost priority for the Mehtas is to provide for their daughter’s education, they should start a PPF account in her name. Since she is three years old, ordinarily the need for spending for higher education would arise, say, 18-20 years from now. For this purpose, a sum of Rs70,000 per annum, or Rs5,800 per month, can be accumulated in the PPF account. The funds for this can be sourced from the Mehtas’ monthly surplus mentioned above.

This would ensure that they have an assured and guaranteed sum of Rs32 lakh by the time Pari grows up and requires the money. I repeatedly emphasise that no child plan or any other investment can offer you such a high guaranteed amount.

Marriage
The next need in the order of priority is provisioning for gold for Pari’s marriage. Here it is assumed that she would be married around the age of 26 years — which means there are 23 years to go for her marriage.

For this purpose, it is suggested that the Mehtas buy 1 unit (equivalent to 1 gram) of gold per month. This can be achieved by investing in a gold ETF (exchange traded fund). 1 unit per month over 276 months (23 years) works out to 276 grams or approximately 28 tolas. The ETF route is one of the most efficient ways of investing in the yellow metal.

The funds required for this (around Rs2,150 per month at current prices) can be out of the balance monthly surplus of Rs20,200 (after accounting for PPF). The balance of the surplus can be routed towards retirement planning.

Car
The vehicle is expected to cost around ¤8 lakh. For this, the Mehtas could use Mrs Mehta’s PPF account that is due to mature shortly to partly defray the cost of the car. The balance money required could come out of redeeming the post office investments.
Retirement

It is assumed that the couple would work till the age of 58 which means they have around 20 years left for retirement.
Their current combined PF balance is Rs11.50 lakh. Their monthly provident fund contribution is Rs10,000 per month. The maturity value of this amount at the current PF interest rate of 8.5% per annum over the next 20 years would work out to Rs1.25 crore.

Additionally, their current investment in equity and mutual funds is around Rs3.40 lakh as lump sum and Rs5,000 as SIP.

Furthermore, it is suggested that out of the balance monthly surplus, Rs10,000 be earmarked for retirement by way of investing in quality mutual funds on an SIP basis.

At a conservative rate of 12% per annum, the total amount (current as well as the suggested SIP) would grow over the next 20 years to around Rs1.85 crore.

This way the combined retirement proceeds including the PF money would work out to Rs3.10 crore. (Rs1.85 crore + Rs1.25 crore of the PF money)

Pension
After retirement, one typically needs a monthly pension to take care of day to day needs.

The above retirement fund may be invested either at the rate of risk free 9% per annum or in mutual funds at 12% per annum. Ideally, the money should be invested in a mix of risk-free deposits and lower risk mutual funds. Consequently, it is assumed that the average return that the retirement corpus will earn will be around 10% annually.

At this rate, the Mehtas’ would receive a cheque of Rs2.62 lakh per month.

Emergency fund
Though the Mehtas haven’t specifically mentioned this, a prudent financial planner would always provide for a certain amount of money that is liquid and readily available to cater for emergencies. For this purpose, we advise the Mehtas to put the balance residual from the monthly savings into a recurring deposit.  
Review

As usual, the Mehtas would be well advised to periodically review this financial plan and make necessary adjustments going forward, if necessary with the help of a professional financial planner. But, remember that it is never a good idea to depend entirely on someone else. Start drawing your own map and go to the professional only for fine tuning.

The writer is director, Wonderland Consultants, a tax and financial
planning firm. He may be contacted at sandeep.shanbhag@gmail.com