I am 30, and just started a business venture in the food industry. My wife (29) is a stock market consultant. We will soon become parents. Our monthly expense is Rs 50,000 (including rent). My wife's monthly income is approximately Rs 15,000 and is dependent on renewal from clients.

We have Rs 1.5 lakh in a savings account to meet any shortfall in monthly income. We have four FDs maturing between 2011 and 2013.The maturity value of the deposits is Rs 2.55 lakh. Suggest an investment option for the money.

We have four traditional insurance policies — two money-back and two endowment. I have a sum assured for Rs 8lakh and my wife is covered for Rs 9 lakh. We invest in recurring deposits every month for the annual premiums of Rs 1 lakh. I purchased a flat for Rs 40 lakh last year (20-year loan). There has been an appreciation in rate per sq.ft of 25 per cent this year. I am anticipating possession by 2013.

Is it better to sell the flat or should I rent it out?

EMIs after possession are Rs 53,000 for initial four years and Rs 16,000 for 16 years. We plan a foreign trip and one domestic trip every year for which I may require at least Rs 2 lakh. We have decided to have one child. I wish to have Rs 20 lakh (present value) towards higher education by 2027. For marriage of the child, I may require Rs 20 lakh (present value) by 2035. I plan to purchase a house to live in by 2020 — estimated at Rs 1 crore. In 2015, I plan to purchase an SUV for which I need Rs 20 lakh.

If I wish to retire from my business at 50, how much would be sufficient to meet retirement needs till I turn 80?

If there is a shortfall in my retirement income I will rent out one house. Being new to business, I may earn Rs 50,000 a month first year. But from the second year I expect to make Rs 1 lakh a month for five years. Based on our potential income, suggest investments that will meet our expenses and fulfil our plans. I have invested Rs 1 lakh in equity.

Can I explore the possibility of fresh investment?

— Mathew (name changed on request).

Solution: In any business cash flows are unpredictable in the earlier years. Till your cash inflows stabilise, postpone your savings towards financial goals. Besides that, based on your expected monthly income, there is every possibility that expenses will overshoot, at least in the first year of your business.

If you wish to achieve your financial goals, you need to balance your income and expenses to generate surplus. For instance, your expected second year income is Rs 1 lakh but your home loan EMI alone is Rs 53,000. Besides that, for all your goals and to meet your monthly expenses you need Rs 1.15 lakh. It is better to go for level EMIs rather than balloon payment in the first four years. If you opt for level EMIs, your monthly outgo will be Rs 33,000.With your wife's income, you can comfortably meet the family expenses.

You can accommodate the financial goals, based on priorities, from the second year of business operations provided you achieve the expected earnings.

If this is your first residential property, don't trade it because the price has gone up. Redeploy the maturity proceeds of life insurance to meet your short-term goal of buying a car.

Education: Even if you consider an inflation of 7 per cent, Rs 20 lakh will be Rs 59 lakh at the end of 16 years. To meet the target, you need to save every month Rs 10,250 for the next 192 months and it should earn a return of 12 per cent.

Marriage: To arrive at the marriage expenses at the end of 12th year, consider factors such as inflation, change in living the standards and societal trends. Considering inflation at 7 per cent, Rs 20 lakh will be Rs 1 crore at the end of 24 years. To reach the goal, you should save Rs 6,040 for the next 288 months and the investment should earn 12 per cent.

Retirement: If you do not wish to be dependent on business income to lead a comfortable life, you have to save substantially every month.

Taking your requirement of Rs 35,000 (70 per cent of your current expenses) into account, your monthly requirement by the time you turn 50 will be Rs 1.3 lakh, at an inflation of 7 per cent. For this, you should have at the time of retirement a corpus of Rs 4.6 core and it should earn inflation adjusted return of 2 per cent to meet your needs till the age of 80.

To have a corpus of Rs 4.6 crore you ought to save every month Rs 48,900 and it should earn a return of 12 per cent. With your expected earnings for the next five years, this appears to be a tall order. If you wish to fulfil this goal, you may need to sacrifice short-term goals such as buying a car and building an independent house.

To fulfil your goals just push your retirement to 60 years. By doing so, with just Rs 14,990 a month you can accumulate Rs 4.6 crore.

Investment: Your exposure to insurance is through traditional plans, which will not help you beat even inflation.

To achieve all your goals, you need to construct a portfolio with asset allocation in the band of 60:30:10 in favour of equity, debt and gold. To protect all your goals, take a term insurance for Rs 1.50 crore and the premium out go will be Rs 12,500 a year.

Queries can be sent to >financialplanning@thehindu.co.in

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