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Ask Mint Money | While planning a corpus, don’t make unrealistic assumptions

Ask Mint Money | While planning a corpus, don’t make unrealistic assumptions
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First Published: Thu, Dec 29 2011. 07 22 PM IST

Updated: Thu, Dec 29 2011. 07 22 PM IST
I am 26 years old and my net salary is Rs 45,000. I work in Mumbai. I want to buy a house in the next three to four years. I don’t have any investments or insurance and can save Rs 22,000 per month.
—Janvi Joshi
It is good to know that you want to save 50% of your salary. To invest in a property, you need to create a corpus which can be used to make a downpayment and the balance can be offset with a loan. Assuming you are able to save Rs 22,000 per month and without any increase in savings over the next four years, you will be able to save a principle of Rs 10.56 lakh. Adding an interest of 10% annualized will result in a corpus of Rs 12.71 lakh. This can be the downpayment amount and you can start a monthly instalment for the loan based on your cash flow.
Though this is doable, it is not as easy as it sounds.
As of now you are able to save 50% but with increasing commitments you may not be able to do so. Also as you said, you don’t have any investments or insurance. What happens in case of an emergency? You need to be prudent enough to provide for the same.
The idea is not that you don’t buy a property. How you can create a balance among your investments, insurance and real estate is the key.
You need to create different baskets of savings which will provide for all asset classes. You may not be able to buy the property after four years but may do so after six years, or you may buy a smaller one and not the one which you wanted to buy in the first place.
I am 30 years old and I want to start my own venture in the next 8-10 years for which I will need Rs 1 crore. I can save Rs 30,000 per month. Please suggest.
—Ruchi Sharma
Creating a corpus of Rs 1 crore will not be easy. A savings of Rs 30,000 per month translates to Rs 3.60 lakh per annum which without considering interest becomes Rs 36 lakh in 10 years. Now to turn this Rs 36 lakh to Rs 1 crore needs a lot of hard work. There are two variable in this number crunching—interest rate (how much you can earn year-on-year) and growth (by how much you can increase your savings year-on-year). Assuming an average interest rate of 10% and the average growth rate of 8%, you will accumulate Rs 78.27 lakh at the end of 10 years. You can tweak the numbers and the result will vary. For instance, at 12% interest and 10% growth rate, you will have Rs 92.17 lakh. But if you want to play safe, take conservative numbers of 8% interest rate and 5% growth. This will grow your money to Rs 63.60 lakh. But don’t make any assumption which are not realistic and evaluate your assumptions every year.
Lastly, don’t get too much attached to the magical number of Rs 1 crore. You can always start small as you will not need all the money at one go.
Surya Bhatia is a certified financial planner and principal consultant, Asset Managers.
Queries and views at
mintmoney@livemint.com
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First Published: Thu, Dec 29 2011. 07 22 PM IST