Last Updated on October 30, 2019 at 10:57 am
In a recent poll conducted by freefincal on parenting challenges, 227 out of 430 parents (52.8%) with two (or more) children said they have not checked if they can afford college fees and still be able to fund their retirement. A good 23% of the participants said they would have a second child even if they cannot afford one!
Low income, unplanned decisions and unrealistic goals are relatively common among middle-class households. When SEBI registered fee-only financial advisor Preeti Zende discussed the financial plan for a couple with kids, many readers were in disbelief – how can we invest so much for such financial goals?
In a follow up to her first article here – How I Helped a Young Nuclear Family Invest For Their Children’s Future – Preeti discusses a case with a mismatch between earnings and aspiration and how best to handle this.
Preeti Zende is a SEBI Registered Investment Advisor (RIA) and Fee-only Financial Planner based in Navi Mumbai India. She is an Associate of Insurance Institute of India (AII) and has a post-graduate Diploma in Business Finance from ICFAI university. She also holds a Masters’s degree in Commerce from Pune University.
Join 32,000+ readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email! (Link takes you to our email sign-up form)
🔥Enjoy massive discounts on our robo-advisory tool & courses! 🔥
Preeti was associated with the Insurance and Finance industry for long and having experience in both administration and marketing of Financial products. She had worked as a Medical and Nonmedical Underwriter and was heading a Quality check team in Reliance Life Insurance Company. She also worked with ICICI Prudential Life Insurance Company’s sales and marketing team. You can contact her via her website, Apanadhan.
—————
As financial planners, we come across many types of clients. Some are earning well, and some are from medium earning group, some are with double income, some are the only earners in 6 family members, some are conservative investors, some are very aggressive investors, some are confused about life goals and some are very focussed and well prepared. Some are very cooperative, and few are rigid.
Financial Planners do not just plan your finances, but they work more on the client’s behavioural and psychological pattern towards Personal Finance and life too.
What are the priorities of a financial planner when a client approaches them? To make them understand the importance of identifying their life goals and plan their investments accordingly.
Sadly this process is not straightforward. When clients pen down their life goals and aspirations, many times, there is a mismatch. Therefore we need to prioritise.
Some of you may have seen the reactions to my previous article of planning education and marriage for children. The case discussed of Ventakesh and Latha, got many comments about the high monthly investment required for Kids education and marriage planning. In that case, that couple was earning well, and they could afford to allocate that much amount for Kids education and marriage planning as their other life goals were set.
This is not the case for many middle-class Indian families. Parents do want to give best to their kids, but this depends on our income. If our finances permit, we can fulfil those and feel relaxed, but if not, then what can we do? What can a financial Advisor do in such a situation?
she can give a rosy picture to the client and convey them that “All is Well “now and “All will be better tomorrow” or can be fair with them and make them understand the real situation and provide the solution accordingly.
The first way is rather easy. Everybody wants secure solutions and assurance that things will always be favourable. How can this picture be created?
- Assume that the client’s risk profile as aggressive.
- Allocate a higher portion to equity.
- Consider
- equity will give 15% or more returns
- a higher interest rate in debt allocation.
- lower inflation rate for the goals.
So now the overall portfolio return is high and one can invest less in this rosy picture. However, the chances of failure are high as none of these are realistic. A better way is to take the long and rough road to the destination – I prefer this. So let us consider another couple.
Prashant and Sneha are a lovely couple having two adorable kids Anaya who is 7 yrs old and Aarav who is 2 yrs old. Coming from a middle-class background they know the value of education. They also have similar goals as any Indian family has and need to fit all these into their earnings. Prashant is a sole earner right now as Sneha took a sabbatical for kids. Apart from kids’ education and marriage planning Prashant is worried about his retirement and his huge EMI he is paying towards his house.
In Prashant and Sneha too want to plan for the maximum corpus they could afford for their kids but do not know how because of their limited disposable income. I assured them we can mutually can work out the best possible solution.
We jotted down all their life goals and segregated these as short, medium and long term goals. Then assuming a current cost for each goal, the future cost was calculated adjusting for inflation. From this, the monthly investment is determined.
To Prashant and Sneha’s surprise, the total monthly investment was huge. Realistic calculations can be harsh. They were made to understand for their current income they will not be able to satisfy each and every goal. In such situations, what could be honest and workable advice?
- Prioritize life goals: Give priority for retirement planning over any other goal. After retirement kid’s education and marriage planning goals, house purchase, car purchase goal, and dream vacations etc can be accounted for.
- Invest in the proportion of the priority and urgency
- Study your spending pattern: When we can’t invest the required amount to fulfil our goals what we can do? We have two options: spend less or earn more. We need to work on both options. While studying our spending pattern we can put needs over wants. Pen down each expense or track the average of six months expenses, etc.
- Save first spend later: This will help to increase saving as you can fix your monthly saving percentage and achieve it.
- Make a monthly budget: Budgeting helps to be disciplined in spending and any impulsive spending can be curbed.
- Be content and find real happiness in experiences rather than things: If we start moulding our mind towards happiness we are deriving from the experiences, our desire to spend on material happiness will go down. This will help in increasing our savings.
- Focus on secondary/passive income: In this modern world, there are n numbers of good options available to earn a secondary income. Explore them. Focus on those in which you have interest and knowledge. Use your extra time to earn this income which will help you all achieve all those dreams and aspirations you have in mind. Some examples: How to Make More Money In India: Forty real examples
- Upgrade your skills and knowledge for a better prospect.
It was not hard to convince Prashant and Sneha to work on these aspects. We mutually derived the following points on which the financial plan was based.
- Prashant could save Rs.65,000 per month after they both work on their spending pattern and saving methods apart from his home EMI. Prashant and Sneha had given priority to retirement, kids education and marriage planning. Because house purchase and emergency fund were already set. They agreed to postpone their foreign holiday goal for some years.
- Return assumptions were Equity return in long term: 10%, Debt return(After tax)- 6% and Debt return from tax free products : 7% . and Average portfolio return 8.4%.
- Asset allocation for long term goals (More than 10+ years) Equity: Debt in the ratio of 60:40
Retirement goal
- Based on Prashant’s inputs his required corpus for retirement is Rs.6.36 Cr with 8% inflation.
- Years to achieve 25 yrs goal with a portfolio return of 8.4%
- For that, he had to shell Rs. 40,000 per month with 5% step-up SIP every year.
Anaya’s education
- Based on his inputs his required corpus for Anaya’s education is 3.89 Cr with 10% inflation
- Years to achieve 10 yrs goal with a portfolio return of 8.4%
- For 15 lakhs current cost that he had to shell Rs.17,000 per month with 5% step-up SIP every year.
Aarav’s education
- Based on his inputs his required corpus for Aarav’s’ education is 6.26 Cr with 10% inflation
- Years to achieve 15 yrs goal with a portfolio return of 8.4%
- For 15 lakhs current cost that he had to shell 13000 Rs per month with 5% step-up SIP every year
Anaya’s marriage
- Based on his inputs his required corpus for Anaya’s marriage is 3.85 Cr with 6% inflation
- ·Years to achieve 18 yrs goal with a portfolio return of 8.4%
- For 13.50 lakhs current cost that he had to shell 5450 Rs per month with 5% step-up SIP every year
Aarav’s marriage
- Based on his inputs his required corpus for Aarav’s’ marriage is 4.72 Cr with 6% inflation
- Years to achieve 25 yrs goal with a portfolio return of 8.4%
- For 12 lakhs current cost that he had to shell 3250 Rs per month with 5% step-up SIP every year
Prashant and Sneha have to shell Rs 78,700 for retirement and kids graduation and marriage expenses. However, the maximum amount which they can invest is 65,000 only. In such a situation we do not compromise on the retirement goal amount. So we reworked the kid’s education and marriage goals.
Remaining Rs.25,000 was allocated according to the other goal’s time frame and necessity.
Anaya’s education: New current value 10 lakhs required amount Rs11350
Aarav’s education: New current value 9.95 lakhs required amount Rs 8650
Anaya’s marriage: New current value 9.05 lakhs required amount Rs 3650
Aarav’s marriage: New current value 5 lakhs required amount Rs 1350
The current expenses for these goals can be increased in future when their income increase. Also, one could prioritise education over marriage, to begin with, or could re-tag the corpus amounts later. It is better to plan a small amount towards marriage goals than dip into the retirement corpus later. Money being fungible can always be reshuffled at will. There are multiple client situations and multiple solutions for the same situation! The key is to start with one Prashant and Sneha are comfortable with. Here we haven’t taken any unnecessary risk in investment and not considered any fancy returns from financial products.
Editor’s note: In the above-mentioned poll on parental challenges, 48% of the 531 respondents said they want to plan for their children’s marriage and 64% said they will dip into their retirement corpus if needed for their children’s education. It is important for readers to recognise that personal finance is truly personal and the financial planner will have to find common ground between what makes financial sense and what the client wants. Now back to Preeti.
- When kids are younger we don’t know how much money we need to accumulate for them. Always strike a balance while accumulating the corpus.
- Don’t dream of glorified carrier options for your kids. There are plenty of other well-paid streams available where the education cost is much cheaper. Gather information about such options and let your teenagers know about them.
- Discuss openly with your kids when they are in their teens and when they become sensible enough to understand about family’s financial strength. Have an open money discussion and get them enrolled in this.
- Encourage kids to go for scholarships. Ask them to put extra efforts for such scholarships which are going to help them to chase their dreams.
- One more option for funding towards kids education is through educational loan also. I personally feel, going with an educational loan, sometimes we may infuse the seriousness of their educational spending and their responsibilities towards repaying the loan once they settle in their profession.
- Last but not least even if as on date you may find your desired goals are not realistic compared with your current earnings don’t be disheartened. You have to plan things according to your current investible surplus only and may have to trim the targeted corpus required to achieve those. In future when your income increase you can recalculate the corpus required for each goal and increase investments.
Financial Planning is a lifelong dynamic process. We have to keep reviewing our financial situation periodically, make necessary changes in our corpus requirement from time to time according to the change in our income and expenditure, family responsibilities, market returns etc and see how we can achieve all our dreams in our lifetime.
🔥Enjoy massive discounts on our courses, robo-advisory tool and exclusive investor circle! 🔥& join our community of 7000+ users!
Use our Robo-advisory Tool for a start-to-finish financial plan! ⇐ More than 2,500 investors and advisors use this!
Track your mutual funds and stock investments with this Google Sheet!
We also publish monthly equity mutual funds, debt and hybrid mutual funds, index funds and ETF screeners and momentum, low-volatility stock screeners.
- Do you have a comment about the above article? Reach out to us on Twitter: @freefincal or @pattufreefincal
- Have a question? Subscribe to our newsletter using the form below.
- Hit 'reply' to any email from us! We do not offer personalized investment advice. We can write a detailed article without mentioning your name if you have a generic question.
Join 32,000+ readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email! (Link takes you to our email sign-up form)
About The Author
Dr M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over ten years of experience publishing news analysis, research and financial product development. Connect with him via Twitter(X), Linkedin, or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free investment advice.Our flagship course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! ⇐ More than 3,000 investors and advisors are part of our exclusive community! Get clarity on how to plan for your goals and achieve the necessary corpus no matter the market condition is!! Watch the first lecture for free! One-time payment! No recurring fees! Life-long access to videos! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
Our new course! Increase your income by getting people to pay for your skills! ⇐ More than 700 salaried employees, entrepreneurs and financial advisors are part of our exclusive community! Learn how to get people to pay for your skills! Whether you are a professional or small business owner who wants more clients via online visibility or a salaried person wanting a side income or passive income, we will show you how to achieve this by showcasing your skills and building a community that trusts and pays you! (watch 1st lecture for free). One-time payment! No recurring fees! Life-long access to videos!
Our new book for kids: “Chinchu Gets a Superpower!” is now available!
Must-read book even for adults! This is something that every parent should teach their kids right from their young age. The importance of money management and decision making based on their wants and needs. Very nicely written in simple terms. - Arun.Buy the book: Chinchu gets a superpower for your child!
How to profit from content writing: Our new ebook is for those interested in getting side income via content writing. It is available at a 50% discount for Rs. 500 only!
Do you want to check if the market is overvalued or undervalued? Use our market valuation tool (it will work with any index!), or get the Tactical Buy/Sell timing tool!
We publish monthly mutual fund screeners and momentum, low-volatility stock screeners.
About freefincal & its content policy. Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on mutual funds, stocks, investing, retirement and personal finance developments. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than three million readers a year (5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified with credible and knowledgeable sources before publication. Freefincal does not publish paid articles, promotions, PR, satire or opinions without data. All opinions will be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
Connect with us on social media
- Twitter @freefincal
- Subscribe to our YouTube Videos
- Posts feed via Feedburner.
Our publications
You Can Be Rich Too with Goal-Based Investing
Published by CNBC TV18, this book is meant to help you ask the right questions and seek the correct answers, and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now.Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want
This book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at a low cost! Get it or gift it to a young earner.Your Ultimate Guide to Travel
This is an in-depth dive into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, and how travelling slowly is better financially and psychologically, with links to the web pages and hand-holding at every step. Get the pdf for Rs 300 (instant download)