Why Personal Finance is Personal: Customized Solutions for Financial Success

Published: May 8, 2024 at 6:00 am

I’ve recently started earning, and while my salary isn’t substantial, I’m eager to dive into investing. However, I’m uncertain whether the monthly investment amount I can invest will be sufficient to reach my financial goals. This dilemma isn’t unique to me, so I’ve decided to explore this topic further by writing an article. The solutions we uncover can benefit anyone, regardless of their current stage in life.

About the author: Ajay Pruthi is a fee-only SEBI registered investment advisor. He can be contacted via his website plnr.in. Ajay is part of the freefincal list of fee-only advisors and fee-only India.

To illustrate, let’s consider Ajay, who’s 25 years old and planning to retire at 55. He aims to provide a monthly expense of 30,000 during retirement (at today’s cost). Projecting forward, that 30,000 will equate to 1.70 Lakhs per month due to inflation of 6%, requiring a retirement corpus of 5.40 Crores.

We anticipate a return of 9% from a combination of equity and debt investments. What options might be viable in this scenario? Let’s explore various solutions, delving into why this process is termed personal finance.

Fixed SIP – If you have the required funds available. If you possess the necessary funds to invest every month, the required amount would be approximately 32,000 monthly, assuming a 9% return on investments.

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Increasing SIP – What if I cannot invest 32,000 per month? For those just embarking on their earning journey and unable to commit to a 32,000 per month investment, other options exist, mainly if one is unwilling to compromise on retirement expenses.

One such solution involves opting for an increasing SIP. This strategy entails initiating investments at a certain amount and incrementally raising it by 5% each year to align with your financial goals.

How much would you need to invest initially if adopting an increasing SIP? You would initially need to invest 18,500 per month, increasing the investment amount by 5% annually. This would mean investing 18,500 now, 19,425 from the following year onwards, and continuing the upward trend.

Consequently, there would be a difference of approximately 13,500 between opting for a fixed SIP and an increasing SIP.

I am investing for a limited number of Years – What if I can invest more than 32,000 monthly for a set period?

Consider a scenario where I can invest significantly more than 32,000 per month due to being on an onsite assignment, with the ability to sustain this level of investment for the next three years.

The investment required for these three years would amount to 1,29,000 per month. Yes, you read it correctly.

Here’s how it works: By investing 1.29 Lakhs per month, the value would reach approximately 53 Lakhs after three years, assuming a 9% return on investments.

This 53 Lakhs, through the power of compounding, will burgeon to 5.40 Crores over the subsequent 27 years without requiring any additional investment beyond the initial three years.

Such additional investment can pave the way for further solutions.

Early Achievement of Goals – What if I can invest more than 32,000 monthly until retirement? If the sole objective is retirement and you can allocate more than 32,000 per month towards investments, aiming for early retirement becomes feasible. Let’s explore this strategy.

Consider Ajay, who seeks to determine the duration of his working years since he can invest approximately 44,000 monthly. Under these circumstances, the calculations alter significantly. With an investment of 44,000 per month, Ajay could retire by 50.

Furthermore, early retirement can be pursued in various scenarios, such as:

  1. Having additional investments for the initial 3-4 years followed by the standard investment amount for the remaining years or
  2. Beginning with a 32,000 per month investment (as in the initial scenario) and gradually increasing investments by 5%-10% annually.

Delayed Start of Investments – What if I can only begin investing after two years? Consider a scenario where I can commence investing only after a 2-year delay, as I prioritise other goals during this initial period. How would this impact the calculations?

Despite the retirement corpus remaining constant at 5.40 Crores, the investment timeframe was shortened to 28 years due to the delayed start. In the case of a fixed SIP, the monthly SIP amount will increase to 39,000 when initiating investments after two years.

Similarly, for a 5% increasing SIP, the monthly SIP amount will rise to 22,500 with a delayed start of investments after two years.

Backward Calculations – What if I can’t even invest 18,500 at present? The calculations presented in the preceding examples rely on forward projections, assuming either the fixed/higher investment amount or the amount with increased SIP can be managed. But what if this isn’t feasible? The solution lies in backward calculations.

To begin, determine the monthly amount you can invest based on your financial surplus. By working backwards from this figure, you can ascertain the level of sustainable retirement expenses every month.

Let’s illustrate this approach. Suppose Ajay can only allocate 15,000 per month towards investments. Would he still be able to achieve his retirement goal? By incrementally increasing investments by 5% annually, Ajay could accumulate approximately 4.46 Crores over 30 years. With this corpus, he could manage monthly retirement expenses of 25,000.

However, if Ajay is unwilling to reduce his retirement expenses, he must extend his retirement age by 2-3 years. This exemplifies how different solutions can be tailored to individual or familial goals, underscoring why it’s called personal finance.

While I’ve simplified this example with a focus on retirement goals, similar solutions can be crafted for various objectives. If adequate funds are available for all goals, that’s ideal. But if not, prioritising goals becomes essential.

*Disclaimer- Nothing in the article is my solicitation, recommendation, endorsement, or offer. If you have any doubts as to the merits of the article, you should seek advice from an independent financial advisor. Registration granted by SEBI, BASL membership, and NISM certification does not guarantee the intermediary’s performance or provide any assurance of returns to investors. Investment in the securities market is subject to market risks. Read all the related documents carefully before investing

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Pattabiraman editor freefincalDr 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.
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