Goswamis have just welcomed their early planned approach for seeking help to chart out a plan for managing their money matters is often considered the first step towards financial planning. They have bundle of joy, their daughter Shruti, who is 11 months old. Mohan, 31 is in business of supplying hosiery and garments and his clients are largely based in state of Punjab and Haryana. His business earns him Rs8 lac annually means Rs66,000 average per month. He is married to Ritu and she is housewife. They are spending averagely monthly expenses of Rs38,000. Like most of us, Goswami’s motivation for seeking financial plan is desire for a secure life after retirement. That apart, the couple is also planning for international vacation in 2017, a new car before the end of this year, Shurti’s education and marriage in around 2038. What’s comforting is that he is not burdened with servicing loans or any other form liabilities.

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Though, Mohan is in business, he is not worried about losing his job, but his biggest worry is that his income from his business might stop suddenly. So can he still secure his retired years financially? Let’s check.

Investments

Goswamis have paltry exposure of equity mutual fund of Rs60,000 only and more in debt securities in the form of Public Provident Fund (PPF) worth Rs 2 lakh, bank fixed deposits of Rs5.40 lakh and bank saving balances for Rs4.50 lakh. Their investments reflect their net worth Rs12.50 lakh which is good show in their early stage.

Contingency Reserve

We advise him to create a contingency reserve of 12 months rather than 6 months, which we generally advise. Of these, 6 months of business expenses should be maintained as emergency fund, he may see some dry months in his business during any recession period. Other 6 months expenses have to be reserved his monthly homely expenses and to make sure that his investments for financial goals continue without any break. He has already maintained sufficient balance in his bank saving balance worth Rs 4.50 lakh to meet any contingency reserves that may arise in the future, can be assigned for this purpose.

Insurance Planning

As his family as well as his business are dependent on him. Since, Mohan has not bought any life insurance for himself; he should take a term cover of at least Rs1.20 crore to ensure that their regular needs and even business are protected. He should also consider a ‘key man’ policy for his business. To cope up any medical exigencies, he should buy a family floater medical insurance policy of at least Rs 5 lakh. He should also add a critical illness cover of Rs10 lakh for his family.

Financial Goals

Mohan has to invest diligently to achieve the following goals:

  1. Buy a new car

Mohan would like to buy a new car before the end of this year. We assume that the new car cost around Rs4.50 lakh. He should use the amount lying in bank fixed deposit as his FD will mature in the middle of this year. He should not take any car loan to save his FD as present interest rate of 12.50% is applicable.

  1. International Vacation Planning

Mohan intends to take his dream vacation with his wife after 3 years. He would like to spend Rs2 lakh on this. After 3 year, his dream cost would be Rs 2.52 lakh while assuming the inflation to be 8% p.a. For this, he would need to invest Rs3,300 per month by opening recurring deposit in a bank to the already invested Rs5.40 lakh in fixed deposits,       in which we have allocated Rs90,000 towards his vacation planning.

  1. Daughter’s Education and Marriage

Like any doting parent, his daughter’s education and marriage make up the most important goal for Mohan. He would like to see Sharuti pursuing engineering by year 2032, followed by an MBA in 2035 and assumes she would get married by 2038. Mohan knows well the costs associated with these goals in today’s terms. But these costs, like all other things, will go up over time and Mohan will have to build a corpus large enough to accommodate them.

Event Target Year Today’s Cost Future Value*
Engineering 2032 10,00,000 55,60,000
MBA 2035 12,00,000 88,80,000
Marriage 2038 12,00,000 76,10,000

*Inflation is assumed to be 10% pa. in case of her education and 8% pa for her marriage.

An SIP of Rs14,620 per month in diversified equity funds are expected to give a return of 15% in the long-term, which should be enough to take care of Shruti’s education and marriage.

  1. Retirement Planning

Though, businessmen or self-employed persons have no specific age to get retirement, they have flexibility of their working life till they desire. But in Mohan case, he has pre-decided that he will work at age of 60 and his retirement requirement of Rs25,000 per month at today’s value, which will mean an inflated amount of Rs 2.33 lakh per month when he retires. The corpus required for that will be Rs5.57 crore and it will suffice till he is 85 years old. Mohan will meet all the goals, if saving earn rate of return 15 per cent p.a. That’s assuming an inflation of 8 percent pre and post-retirement and the rate of return post retirement is 10 percent. It has been assumed that he would stay in his PPF account with worth Rs2 lakh and invest Rs11,000 per month through SIP in equity mutual fund. Once the amount is accumulated, he can gradually start increasing the amount in debt.

Tax Planning

Mohan falls in the lowest tax bracket as he should pay himself as drawing of salary from his business income and can set off business expenses from the income which would lead to get lower tax liability and enhance his cash inflow. The SIP can be done in an ELSS scheme so that he can also save tax on it under section 80C. While making the premium payment of medi-claim insurance, he can also claim deduction under section 80D.

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Suresh Kumar Narula

SEBI Investment Advisor, Founder & Principal Financial Planner at Prudent Financial Planners
Suresh K Narula is founder and Principal Financial Planner at Prudent Financial Planners. He has earned the professional CERITIFIED FINANCIAL PLANNER and got registered with SEBI as Investment Advisor. He writes on personal and financial planning articles and got published in Dainik Bhaskar, Business Bhaskar and The Financial Planner's Guild, India. He is also a member of Financial Planner's Guild India ( An association of practicing SEBI registered Investment advisers) to create awareness about Financial Planning in general public, promote professional excellence and ensure high quality practice standards. Suresh received his an M.com from Himachal Pardesh University and an MFC from Punjab University, Chandigarh. He can be reached at info@prudentfp.in
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