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Financial planning | Short-term goals not too far away

Financial planning | Short-term goals not too far away
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First Published: Fri, Apr 08 2011. 01 15 AM IST

Updated: Fri, Apr 08 2011. 09 52 AM IST
While saving for long-term goals such as retirement and children’s education is important, they can’t be done at the cost of short-term needs. The car or gadget you are passionate about, the perfect little holiday you dream of or the perfect wedding you always wanted—all need a considerable sum. Acting on impulse and getting into unreasonable debt may not be what you want, so the right thing to do is to plan ahead for your short-term goals. If you are already in debt, you better make getting rid of it a short-term goal, too.
Typically, goals that are one or two years away are classified as short-term, while milestones that are three to five years away could be termed as medium-term goals.
We short-listed six most common short-term goals: holidaying abroad, renovating a house, higher studies, getting rid of debt, buying a car and planning a wedding. We took individual cases and got financial planners to give a solution. While your situation may not be the same, the examples discussed here can give you an idea on how to go about saving and planning for your goals.
HOLIDAY
Zainab Jabri is single and wants to go on a holiday abroad with her parents, three years from now.
She earns Rs 1 lakh per month. She pays Rs 46,000 per annum as premiums towards life insurance and invests Rs 5,000 in a mutual fund’s SIP. She can save another Rs 20,000 for the holiday. The approximate cost for the trip for Jabri and her parents would be around Rs 4-5 lakh.
Zainab Jabri, 32, Lawyer
Jabri’s goal of making a foreign tour is a mid-term goal. She should invest Rs 20,000 per month through the SIP route into equity-oriented balanced funds for at least 30 months. Take a pick from the Mint50 basket of funds. This shall fetch her about Rs 6 lakh at 12% returns per annum at the end of the 30th month. Then, depending upon the market condition, she should start redeeming the units and putting the amount into either a savings bank flexi account or money market mutual funds (liquid funds). She has almost six months to redeem her mutual fund units based on market conditions. It is very important to remember that one should not wait till the point of goal since there can be fluctuations in the market at that point and one may incur some downward movement in the accumulated wealth. It is advisable to take the systematic transfer plan route after the 30th month to shift the accumulated wealth from a balanced fund to safe funds such as money market or liquid funds.
Yeshwant Ange, Certified financial planner
P.S. Khati retired three years back and stays with his wife in Delhi. He recently bought a flat with financial support from his son, but plans to shift only after two years. The house needs renovation for which Khati needs Rs 2 lakh. He gets a pension and his son sends him some money, out of which he saves around Rs 15,000 per month. He also has a fixed deposit of Rs 50,000.
P.S. Khati, 62, Retired
Khati wants to renovate his house after two years. The cost of renovating the house is about Rs 2 lakh as of today. Since he shall be incurring these expenses two years later, we have to consider the inflated cost at that time. So considering the rate of inflation for renovation at 10%, the cost shall work out to Rs 2.42 lakh. Let’s take the figure at Rs 2.5 lakh.
This being a short-term goal (1.5- 2 years), we advice Khati to invest Rs 10,000 from his monthly savings into short-term debt funds, following the SIP route, which shall fetch him an annual return of around 7-7.5% . Take a pick from the Mint50 basket of funds. The amount will get accumulated to about Rs 2 lakh over 18-20 months. He should start redeeming the units over a period of time as per his plans of renovation in the next six months. The fixed deposit of Rs 50,000 can be shifted to short-term debt funds.
Yeshwant Ange, Certified financial planner
Deepankar Anand got a job in a software company last year right after graduation. He wishes to pursue MBA from a good institution, which could cost him Rs 7-8 lakh, in about two years. But with no savings and a firm determination not to let his ageing parents pay for him any more, he wants to start investing now. He earns Rs 21,000 per month.
Deepankar Anand, 21, Software professional
The dream of higher education can be achieved. But to do that he will have to lead a frugal life for the next few years. By doing his best, Anand can go to the next level of earnings where his life can be smoother. And it’s good he doesn’t want to use his parents’ retirement corpus.
He needs to save as much as he can. Assuming he is able to save half of his salary or more, he can open a recurring deposit account, where the savings starts earning a fixed deposit rate every month. This is a good time to start as the interest rates are high. Over two years, he should target a minimum corpus of Rs 3.25 lakh. Assuming there is a shortfall of around Rs 5 lakh, he will have to go for an education loan. The equated monthly installment will start after he completes his MBA or gets a job, whichever is earlier. This he can plan to pay over five years, where the EMI will be dependent on the prevailing interest rates but should be around Rs 11,000 per month. And with better qualification in hand and a two years’ work experience, he should be able to manage an increased salary and pay off his debt.
Surya Bhatia, Certified financial planner and principal consultant, Asset Managers
Sudip Singha’s love for the lenses and his modest finances led him into buying a camera and equipment on his credit card for Rs 1.50 lakh.
He now wants to get rid of this burden within one and a half years. He earns Rs 35,000 per month and has Rs 30,000 in fixed deposits. He can save only Rs 5,000 per month as his parents are dependant on him.
Sudeep Singha, 28, Software engineer
The trend of “shopping without thinking” has gained grounds over the last few years. Especially with plastic money, you don’t even realize what you are spending on and the reality dawns when you get the credit card bill. While Singha has spent the money on his hobby of photography, he could have been more prudent: he could have saved money before going for the big purchase, especially when he knows his ability to save is restricted. But now that the purchase is done, he needs to plan how to pay back the amount outstanding on the credit card. The average interest rate at which he will be paying the credit card will be a whopping 30% or even higher. He needs to use his fixed deposits to pay a part of the outstanding loan and then consider taking a personal loan to pay up the balance. The interest rate on a personal loan will be half of what he is paying now on the credit card. If it’s possible to take a loan from his bank, he may get a personal loan that is cheaper by 1%. The only challenge would be that the personal loan may not be available for one and a half years.
Surya Bhatia, Certified financial planner and principal consultant, Asset Managers
Bikes always fascinated Bijoy Raha. He bought one on a personal loan and will pay the last instalment next month. He now plans to upgrade to a four-wheeler. His range: Rs 5-6 lakh; time frame: two-three years. He can take a loan. He earns Rs 40,000 and can save around Rs 15,000 per month. He is expecting a salary hike of Rs 8,000 in April.
Bijoy Raha, 27, Optical engineer
Unlike most, Raha wants to save for the upfront payment, which is good. He should invest 70% of his savings in equity funds and 30% in debt funds. Although car purchase is not really a long-term goal, higher allocation in equity is suggested because even in the worst-case scenario, it can be postponed, being a discretionary goal. His current surplus of Rs 15,000 per month will fetch him a corpus of Rs 3.97 lakh and the additional Rs 8,000 by way of hike will add Rs 2.11 lakh at the end of two years; the total corpus coming to Rs 6.09 lakh. This is assuming a 12% return on equity funds and a 6% net return on debt funds. Assuming car prices increase by 5% in two years, his Rs 6 lakh car would cost Rs 6.61 lakh. It is suggested that 75% of the car cost is funded by a loan. He should avoid personal loans and should take proper vehicle loan so that the cost of servicing the loan is less. The additional funds can be predominantly deployed in the growth asset class, which could yield higher returns yield than the cost of servicing the loan over the long run.
Suresh Sadagopan, Certified financial planner, Ladder7 Financial Advisories
Payel Basu has been working since four years, but she hasn’t been able to save anything till now. She is 25 and plans to get married in five years. She needs a plan for saving enough for a modern wedding so that her parents do not have to take a loan for the purpose. She earns Rs 40,000 per month and can save around Rs 20,000 out of it.
Payel Basu, 25, Assistant manager
Typically, most people spend what they earn in the initial years and think of starting to save only when they see some specific goal in the future. In Basu’s case, since she is starting at 25, she can have investments predominantly in equity-oriented instruments, such as equity-oriented mutual fund (MF) schemes or direct equity. Equity-oriented MFs are recommended as they are inherently less risky and also have professional oversight through a fund manager. She should invest 75% of her investments (Rs 15,000) in two large and mid-cap equity schemes and 25% in debt funds. Assuming a long-term return of 10% per annum from the balanced funds and 6% net return from debt funds, she would get Rs 15.08 lakh in five years, which will be sufficient to cover the marriage expenses. The rest of the money should be kept for other goals, such as retirement planning, which should ideally begin at an early stage. Also, it is important to look at the portfolio and realign it at least once a year. Basu also needs to evaluate if she has sufficient health insurance.
Suresh Sadagopan, Certified financial planner, Ladder7 Financial Advisories
sonali.c@livemint.com
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First Published: Fri, Apr 08 2011. 01 15 AM IST