Worried your income is not enough? Here is how you can plan for financial goals

Are you worried that you will not be able to achieve your financial goals like kid's education and retirement with your income levels? Here is a step by step solution

Worried your income is not enough Here is how you can plan for financial goals

Published: October 30, 2019 at 10:57 am

Last Updated on

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.

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.

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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.

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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.

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About the Author

M Pattabiraman author of freefincal.comM. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. since Aug 2006. Connect with him via Linkedin
Pattabiraman has co-authored two print-books, You can be rich too with goal-based investing (CNBC TV18) and Gamechanger and seven other free e-books on various topics of money management.  He is a patron and co-founder of “Fee-only India” an organisation to promote unbiased, commission-free investment advice.
He conducts free money management sessions for corporates and associations on the basis of money management. Previous engagements include World Bank, RBI, BHEL, Asian Paints, TamilNadu Investors Association etc. For speaking engagements write to pattu [at] freefincal [dot] com

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2 Comments

  1. Quite a confusing post. A simple table would have sufficed instead of words.
    If Money is fungible and can always be reshuffled at will, then why not have just one retirement goal and another common goal?

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