Don’t take on too many liabilities at once

The Hindu :Suresh parthasarathy:23 June 2012

I am 29 years old and recently got married. My wife is a home maker. My monthly net salary is Rs 65,000 and I get Rs 6,000 by way of reimbursements. My monthly expenses including rent are about Rs 35,000. I am doing a part- time MBA programme for which I pay Rs 90,000 every three months. Six such instalments still have to be paid. My monthly surpluses are used up for this fee. For the shortfall I have taken an education loan of Rs 3.5 lakh. I have certain immediate goals to fulfil, where I need to contribute.

I need Rs 5 lakh for my sister’s marriage seven months from now. I am also thinking of purchasing a second hand car costing Rs 2 lakh. I wish to buy a ready-to-move apartment (after selling off the plot I have), costing about Rs 30 lakh. I wish to save on the rent I am currently paying. Is it feasible to reach these targets? Also, how much do I need to save for retirement? I have a residential plot valued at Rs 11 lakh and ELSS/mutual funds/shares of Rs 2.5 lakh.

My Employee’s Provident Fund balance is Rs 2.5 lakh and I am contributing Rs 3,000 with an equal contribution from my employer. The balance in Public Provident Fund is Rs 50,000. I have deposits of Rs 3 lakh earmarked for my sister’s marriage. I have an endowment policy for Rs 2 lakh with annual premium of Rs 14,000 and Rs 1 lakh policy in my mother’s name. Both the policies will mature in 2031. I have term insurance for Rs 12 lakh with annual premium of Rs 4,000.

Please suggest ways to reach my goals along with any change in asset allocation.

— Aashish

It is possible to meet one’s aspirations through proper prioritising and planning. The tenure of the goal often determines the priority they will receive. It is also the key to go for appropriate asset allocation.

That said, with limited surplus in hand don’t take on too many liabilities at the same time. Your five goals can be prioritised as education, sister’s marriage, retirement, car and buying a house, in that order.

It will take two years to feel the full impact of your education loan because you will currently pay only the interest amount. The principal repayment will kick-in after the course is over.

Do remember that education loans taken for part-time courses do not fit the section 80E deduction criteria. Only full-time courses are eligible for the tax benefit. To fulfil your sister’s marriage needs, you need to borrow as you have very little time to save up. If you take personal loan of Rs 2 lakh (for the marriage) at an interest of 15 per cent for 4 years, your monthly outgo will be Rs 5,560. Along with your education loan commitment, your monthly surplus will be nil. So just postpone the rest of the goals for another two years.

BUYING HOUSE

Your house rent allowance (HRA) benefits will not be equal to your EMI.

Although you have the facility to avail tax benefits for principal and interest, your net benefits of a loan over and above the HRA will be Rs 2,425 per month. For instance, for a 15-year loan at 10.5 per cent interest, your EMI will be Rs 22,108. It means you should have a monthly surplus of Rs 8,000 to buy a house. Hence, we recommend you not to go for a house with immediate occupation. Instead buy a flat that will be ready for occupation after two years. By doing this, once your education commitment is over, you can comfortably meet the EMI.

With cost escalation in key raw materials, many residential properties are not delivered on schedule. Hence, while opting for such a strategy, do check your builder’s track record.

OWNING A CAR

It’s a nice feeling to own a car, that too soon after marriage. But, it should not lead to any financial mess. When you buy a car you have two sets of monthly expenses you will need to bear. One is the regular repayment of the loan and the other is the running and maintenance cost of the car. For a loan of Rs 2 lakh, your outgo at 11.5 per cent for 48 months will be Rs 5,210. Given your currently state, this has to receive priority only after two years.

RETIREMENT

Since you got married recently, it may be difficult to arrive at a monthly household expense. However, assuming household expenses of Rs 20,000 a month, at retirement it is likely to be Rs 1, 24,000, assuming inflation at 7 per cent. To be able to manage this sum till you are 78, you should have built a corpus of Rs 2.69 crore at the time of your retirement. If your EPF annual contribution increases at 5 per cent and continues to earn 8.5 per cent return, your corpus at retirement, along with your current balance, will be Rs 96 lakh.

To meet the short fall you should start investing Rs 9,200 two years from now for the next 300 months and it should earn 12 per cent return. Considering your age and since you are already exposed to equity investments we suggest you to invest 60:30:10 in equity, debt and gold. Debt includes your EPF contribution.