Financial Planning ― Striking a balance between short-term and long-term goals

Balaji, 31, and Geetha, 29, approached us for financial planning. They got married four years back and have a daughter, Preeta aged one. Both Balaji and Geetha are working in private companies.

We assessed their financial position along with their list of goals.

They were found to have a disciplined savings habit. They were maintaining their expenses at a moderate level with some annual travel plans as well. They were a typical young family with lots of short-term goals.

Their concern was they felt that their savings were inadequate to address their short-term goals in the next two to five years. They were inclined to save for their long-term goals such as retirement, so as to enjoy the benefit of compounding. Balancing short- and long-term investing was a challenge for them with limited income and a long list of goals.

Goals

The list of goals was long. Balaji and Geetha wanted to provide ₹1 lakh for their daughter Preeta’s school admission in the year 2022. They wanted to purchase a house worth ₹65 lakh in 2021 with upfront payment of ₹30 lakh. There would be family celebrations in the years 2022 and 2023 that would cost them ₹1 lakh each. They wanted to take a vacation every year that would cost them ₹2 lakh; the couple did not want to forego even that if they opted for a housing loan.

Balaji wanted to buy a bike for ₹2 lakh in the year 2023. Though parents of the couple are financially independent, they wanted to reserve ₹2 lakh as emergency fund since all four of them had some medical issues.

Balaji and Geetha are planning for their second child in the year 2024. Hence, their expenses will go up from 2024. The couple wanted to provide for Preeta’s college education at a current cost of ₹15 lakh and higher studies at a cost of ₹20 lakh. The couple had the same kind of goals for their planned second child as well. They wanted to provide for Preeta’s wedding expenses at her age of 25 at a cost of ₹20 lakh.

Risk assessment and advice

When we assessed the couple’s risk profile, they seemed to be growth-oriented investors with a clear understanding of the benefits of long-term investing. They could have opted for 60 per cent in equity, whereas including their EPF, their current allocation was found to be more than 60 per cent into fixed income of their investment portfolio.

Balaji and Geetha are young with stable careers. We recommended that they have about six months of living expenses as emergency fund which will reduce their anxiety of meeting their short-term goals. They were advised to retain ₹6 lakh in fixed deposits to cover emergency fund, school admission fund, parental support fund and one family celebration. They were advised to gradually increase it every year by another ₹50,000 to account for the rise in expenses and cost of short-term goals.

We also advised them to opt for house purchase with upfront payment of ₹15 lakh to be funded with fixed deposits and mutual funds. They were asked to opt for a ₹50-lakh housing loan which would entail an EMI of around ₹50,000. This could be managed with available surplus and savings by way of rent that was being paid.

They needed to reduce their monthly contribution to recurring deposit from ₹25,000 to ₹10,000. This would help them manage their cash flow in a better way. They were advised to focus on closing their housing loan with increase in income over the years.

Preeta’s college education would cost them about ₹76 lakh when she turns 18. We advised the couple to invest ₹13,000 per month in mutual funds to fund this goal. The return expectation assumed here is about 12 per cent annualised in the long run.

They needed to accumulate a corpus of ₹5.28 crore if Balaji was to retire at the age of 60. It was not a major priority for them. But planning their retirement now with minimal commitment will help them focus on their long-term investments. As they will be able to accumulate ₹2.16 crore from their EPF, they need to invest ₹12,000 per month to build the total corpus of ₹5.28 crore. This too, they could invest in mutual funds with return expectation of about 12 per cent annualised in the long run.

Life is dynamic and their retirement plan could undergo several changes. Hence, it should be monitored by analysing their lifestyle and other factors, so that a sufficient-large corpus is created.

Balaji and Geetha were made to understand that with their current income they were not in a position to focus on all the goals such as higher studies for daughter or education of the planned second child. Skipping funding for some goals would help them manage their funds efficiently and this would provide a clear road map on where they need to focus when their salary rises. They were also advised to look for options for better career growth opportunities.

We also advised them to opt for pure term insurance of ₹1.25 crore each and a family floater health insurance for a sum insured of ₹5 lakh.

The couple wanted to focus on short-term goals, and did not keep sight of a few key long-term goals. We highlighted this and asked them to strike a balance. We highlighted the threats in the long term and advised them to keep looking for opportunities by preparing well now.

(The writer is a SEBI-registered investment advisor at Chamomile Investment Consultants)

Equally important

While providing for short-term needs, it is essential to also invest for key long-term goals such as retirement.

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