Personal Finance

How a techie couple with kids put their finances in order

Sridevi Ganesh | Updated on July 24, 2021

Covid has taught everyone that challenges could come at any time with amplified magnitude

Aakash and Rohini (aged 40 and 37), both employed in the IT industry, wanted to get their finances in order. They have two children: son Raghav (aged 9 and in class 4) and daughter Shreya (aged 3, in kindergarten).

They had listed their goals:

1. To earmark an emergency fund of ₹6,00,000.

2. To ensure all family members have more than adequate health cover.

3. To buy a 3BHK flat in the locality they reside in now. The estimated cost of the apartment was given as around ₹1.2crore. They were curious to find out if they could afford it. Else, they were willing to continue to live in a rented house if that made sense financially.

4. To set up a fund for college education expenses for both kids at ₹20 lakh. (Expected inflation of 8 per cent per annum).

5. To accumulate funds for kids’ marriage expenses at ₹20 lakh each and 400 grams of gold gift to each .

6. To provide a platform for comfortable retirement when Aakash turns 60, assuming current lifestyle expenses of ₹75,000 per month. They wanted to keep aside ₹1-1.5 lakh towards travel expenses every year. Before committing to any long-term liabilities (home EMI, for instance), they wanted to ensure committed savings towards some high-priority goals, especially those related to education.

Review and recommendations

Aakash and Rohini have displayed a disciplined savings habit over the last 6-8 years. Hence, a portion of their existing investments was mapped to education-related goals.

1. A sum of ₹6 lakh was reserved from fixed deposits towards emergency fund.

2. The target cost for Raghav’s college expenses will be ₹40 lakh when he turns 18 at an inflation of 8 per cent per annum. Mutual fund portfolio was rebalanced for ₹17 lakh in large-cap fund to meet this goal at an expected return of 10 per cent CAGR.

3. The target cost for Shreya’s college expenses will be ₹63.4 lakh, using the same assumptions of age and inflation. Mutual fund portfolio was rebalanced for ₹13.25lakh in large and mid-cap fund to meet this goal at an expected return of 11 per cent CAGR over 15 years.

4. Marriage expenses for Raghav (at 25 years of age) will be ₹59 lakh and for Shreya (at 23 years) will be ₹77.4 lakh, considering 7 per cent inflation per annum. Advised to invest ₹11,500 and ₹9,000 per month in mid-cap funds to meet these targets, assuming a 12 per cent rate of return.

5. Gold needed to be accumulated in combination of physical gold and Sovereign Gold Bond for both children every year. They were advised to accumulate gold assets of 10-15 grams in the initial years and increase the purchase over the years depending on the increase in income.

6. With their retirement falling due in the next 20 years, we advised them to map EPF and PPF at current values and further contributions towards retirement along with ₹15 lakh from Equity MF Portfolio. The expected corpus for the family’s retirement for a current monthly expense of ₹75,000 would be ₹9.25 crore. We assumed inflation at 7 per cent per annum prior to retirement (adjusted for life style increase).

Post retirement, inflation was assumed to be 5 per cent as they did not foresee much changes in their life style once they retired. They needed to invest ₹53,000 per month to reach the desired corpus. As their jobs were stable and provided upward revision in incomes regularly, it was advised to invest ₹20,000 initially. The couple can slowly increase this investment once they have repaid at least 50 per cent of the housing loan.

7. Post our detailed discussion, the revised cost to buy a house was estimated to be ₹1.4 crore. They were in a position to allot ₹40 lakh towards this goal, out of their existing investments (remaining FDs and MF investments). Balance ₹1 crore had to be funded with housing loan. EMI for this loan could vary from ₹80,600 to ₹96,000 per month with the interest rate in the range of 7.5 per cent per annum to 10 per cent per annum. As the rates are at the bottom of the curve currently, they were asked to be mentally ready for a hike in rates. It was advised to be ready for ₹96,000 EMI as this would help them to look at partial foreclosures as and when surplus funds were available.

8. If they continue to pay the housing loan EMI for the next 20 years assuming the interest rate in the range of 7.5-10 per cent per annum, the total interest outflow would be ₹93,34,000 to ₹1,31,61,000. The couple also agreed to call-off the decision, if they couldn’t freeze on a property in one year’s time. They will, instead, invest ₹80,500 per month for the next 20 years at an expected return for 10 per cent per annum to arrive at a corpus of ₹6.11 crore, which should help cover the inflation adjusted cost of the house after 20 years.

9. Aakash and Rohini were also advised to opt for pure term insurances covering their expected housing loan liability. It was suggested that the family opt for base cover for health insurance and a super top-up plan for a total sum insured of ₹25 lakh.

Covid has taught everyone that challenges could come at out of hide outs any time with amplified magnitude. Medical uncertainties, employment insecurities after the age of 45 and inflation surprises may pose major challenges to the above plan, going forward.

The writer, Co-founder of Chamomile Investment Consultants in Chennai, is an investment advisor registered with SEBI

Published on July 24, 2021

Follow us on Telegram, Facebook, Twitter, Instagram, YouTube and Linkedin. You can also download our Android App or IOS App.

This article is closed for comments.
Please Email the Editor

You May Also Like