Monday, November 19, 2007

Start early, however little you invest

That is the core advice for DNA Money reader Vikrant Ranade

Balvir Chawla


Vikrant Ranade, 29, is working with Countrywide as a system administrator. He is married and has two sons, Aaryan and Eshaan, who are twins. He has been working with this organisation for the past two years and believes he has a good future with the company. He is expecting a decent rise this year-end when his salary is due for appraisal. At present, he is drawing a salary of Rs 20,000 p.m. and expects a rise of around 30% in the next financial year. Due to the responsibilities and the purchase of a house, Vikrant is left with low savings.

Financial goals
Vikrant is full of dreams and has the will to succeed. He believes that if he dreams big and plans for it, he will definitely achieve it. He plans to buy a car next year by selling off his existing car. He has his eyes set on making a second property, which he wants to be in the form of a penthouse. Also, being from a Brahmin family, he plans to hold his son’s thread ceremony with pomp and fanfare, three years from now. He also has to plan for his children’s education and his retirement.

Present situation
Vikrant is drawing a salary of Rs 20,000 p.m. and his wife is drawing a salary of Rs 2,000 p.m. The EMI for his house property at Panvel is Rs 9,272. This is at a fixed rate for a tenure of 20 years. He has an insurance policy for his kids for which he is paying a premium of Rs 2,717. The other financial details are as follows:
Investments
Mutual funds Rs 1,30,000
(Rs 1 lakh for kids’ education)
Provident fund Rs 20,000
FD & cash Rs 15,000
Assets
House Rs 25,00,000
(Bought at
Rs 15 lakh)
Valuables Rs 1,50,000
Liabilities
House loan Rs 9,50,000
His monthly expenses amount to Rs 10,700. The EMI on his housing loan is Rs 9,272.

Analysis of present situation
Expenses
Vikrant is paying nearly 50% of his salary as EMI. But, over a period of time, this EMI will remain constant and his salary will increase. His expenses on self, accessories and telephone are around Rs 3,500, which is on the higher side. He should try and reduce these expenses and start with a monthly saving plan for investment, however small the amount. Starting a systematic investment plan with a good diversified equity fund would be the ideal way to get started.
He should try and avoid using his wife’s salary and use this amount to save for a longer term.
Insurance
Vikrant is inadequately insured. His insurance requirement is a minimum of Rs 25 lakh for which he can take a term insurance cover, which won’t cost him more than Rs 7,500 p.a. If Vikrant is not covered for mediclaim from his company, he should cover his family under a mediclaim policy for a cover of around Rs 3 lakh for the complete family.

Achieving financial goals
Purchasing car
Purchasing a car can be avoided till some basic investments and cushions have been created. He can probably defer the decision by a year and accumulate the amount to minimise the loan for the new car. At any point, all his EMIs should not exceed 35% of his salary. His salary increments can be used to fund the purchase of his car. He should try and save around 75% of the increase, i.e. if his salary reached Rs 3.25 lakh, then he has an increment of Rs 85,000 and he should try and save around Rs 5,000 p.m. for the next two years to generate a corpus of Rs 1.50 lakh, assuming a return of 15% p.a.
Kids’ thread ceremony
Vikrant needs Rs 1 lakh in three years’ time for the thread ceremony of his children. To reach this figure, he will have to save Rs 2,200 per month, assuming a return of 15% p.a. on the investments. He can start saving his wife’s salary for this purpose and he will definitely reach a figure of Rs 1 lakh.
Penthouse
This goal of Vikrant is 5 years away and assuming his existing house will appreciate @ 10% p.a. for the next 5 years, the value of his existing house will become Rs 44 lakh and his loan amount outstanding will be around Rs 8,50,000. So the amount he can generate from selling his house will be around Rs 31.50 lakh, which can be used as down payment and the balance can be funded through a loan.

Conclusion
Small drops make an ocean. So, Vikrant should start small, remain disciplined and enjoy the fruits of his investments. A start has to be made and it is important for Vikrant to make the beginning as soon as possible. Once he gets into the habit of investing and controlling the expenses, he will have a more clear idea of investments and can also target his future goals and achieve them. Increments at any stage should be used to create assets besides any money coming in bonus or any other form.

Assumptions
The recommendations have been made based on the information provided.

(Source: DNA 11/19/2007)

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