The Hindu Business Line : Building wealth from scratch

I have just migrated to the US for employment. I am 40 years old and my wife is a home maker. We have two daughters aged 4 and 10. I don’t have any savings. I have borrowed huge sums, which I am repaying now.

Assume that I am starting with a debt of Rs 20 lakh and no savings. How should I plan in the next 10 years for the education and marriage of my daughters? I am planning to work in the US till my retirement and later settle down in India.

Current status:

a) I have borrowed Rs 15 lakh to alter my house in my native place and bought a plot at Bangalore. I have taken a housing loan — with a monthly commitment of Rs 15,000.

b) I borrowed Rs 5 lakh to move my family to the US.

c) A few years ago, I bought insurance policies for my whole family; and the total premium outgo yearly is Rs 1 lakh. The sum assured for my daughters is Rs 5 lakh and Rs 3 lakh respectively. I have a risk cover to the tune of Rs 8 lakh and my wife has risk cover for Rs 50,000.

d) My provident fund accumulation is Rs 3 lakh. I may receive the same in the next few months. I would like to invest the money for my retirement benefit. Will I need to pay any tax for the money accumulated?

Based on my current earnings, I will be able to save $2,000 per month. I plan to utilise $1,000 for repayment of borrowings and save the rest every month. My monthly commitment in India is around Rs 20,000, which goes into taking care of my mother and personal loans. I wish to educate my daughters in well-known universities in the US or UK.

Currently the approximate education cost in good universities in UK and the US is Rs 20 lakh. Their marriage expenses might come to Rs 5 lakh in today’s value. Post retirement, I would like to settle in India .

I might then need Rs 20,000 in current value to run my family. My savings is expected to be $1,000 every month from next month onwards for a year. After that it might go up to $1,000-1,500 per month.

Though I am saving $2,000 every month now, I want to repay my borrowing before allocating more money towards my savings.

Once my commitments are reduced, I plan to save more towards meeting my future goals.

In the next 4 years I plan to construct a house in my plot or book a flat. My investment towards this may be a maximum of Rs 20-30 lakh. I can also take an interest-free loan in the US. — Name withheld on request

The Solution

If you are starting with a debt and zero savings, it is mandatory for you to take a re-look at your debt. Your savings might improve, if you could reduce the interest outgo. You can explore the possibility of taking a loan in the US (at this stage you may get a personal loan) as the nation presently has a low interest regime.

Assume that your current interest cost is 12 per cent for your home loan and 16 per cent for personal loan. You can consider raising loan for say at 5-6 per cent in the US and try to close your loan account in India.

If you can achieve this, the effective savings on account of home loan alone will be to the tune of Rs 5,700 every month. Similarly, with your personal loan, you can save about Rs 2,200 every month, if you can get a loan even at 7 per cent; the net effective savings will be Rs 94,000 a year.

This will increase your monthly savings, making it easier to achieve the target. You can adopt this strategy instead of selling the capital asset in Bangalore to square off the loans.Education

You have mentioned that you require Rs 20 lakh for education at current prices. Assuming the average inflation works out to 3 per cent in the US for the next six years, the total cost of the education will be Rs 24 lakh.

Assuming you can generate a return of 10 per cent for the next 6 years, the monthly saving required will be Rs 25,000. For the second daughter, whose higher education you will meet in another 12 years, it might cost you Rs 29 lakh .

For the next 144 months, if you can save Rs 10,500 per month at 10 per cent return, the target can be reached.

Diversify your asset allocation to ensure you achieve the required return without too much risk of losing capital.

Marriage

If you consider average inflation of 6 per cent for the next 20 years, the corpus required for the elder daughter will be Rs 11 lakh and for the younger one it will be Rs 16 lakh. If you can save the interest rate on home loan and the balance of $1,000, the target appears achievable. A monthly saving of Rs 5,600 will ensure that the goal is reached.

Retirement

The present value of Rs 2.4 lakh a year if inflated at 6 per cent for next 20 years from the age of 60 it will be Rs 7.7 lakh. To have this retirement inflow, you should have a corpus of Rs 1.30 crore at the start of 60.

The inflation-adjusted return of 1.90 per cent will take care of your monthly expenses till the age of 80. Since you can only save from next year, you will be left with 228 months to reach the target.

If the PF return of Rs 3 lakh is allowed to grow at 10 per cent, you may have to save another Rs 16,500 every month for the retirement kitty. On the taxation issue, if you held your PF account for more than five years, the money received upon closing the account will not be subject to any tax.

Construction

If your construction cost is going to be Rs 30 lakh, the EMI for fifteen years will be Rs 36,000, if you can avail of the loan at 12 per cent interest. If you save a surplus of $1,000-1,500 from next year you can even consider advancing the start of the construction work

Conclusion

Apart from the above commitments, you are likely to be left with a surplus of Rs 8,000 from next year, which can be used towards taking care of your mother.

The life insurance proceeds can be utilised to improve your standard of living, post retirement. Or, alternatively, if you except your life expectancy to be beyond 80, this money can come in handy.

If there is still a shortfall at that stage, reverse mortgage of your property will provide liquidity from the age of 80, for the rest of the life. To protect one’s life as well as to meet the above goals, it would be prudent to have a term insurance for a sum of Rs 1.9 crore.

Queries can be sent tofinancialplanning @thehindu.co.in

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