SFF ## (Male, 45 + Working WIfe) has a family income exceeding Rs 100 Lacs per year and has a saving capacity of Rs 50 Lacs per year. They have already saved for their son's college education and have a networth of Rs 500 Lacs. Apart from two flats in a metro city, and about Rs 30 Lacs in RBI SGB, almost all of their assets are concentrated in the financial markets. They have got adequate life insurance cover and the health cover provided by their employers are adequate for the moment.

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Their long term goals are a) new property after selling the existing 2 flats, b) son's marriage expenses c) retirement planning with the option of early retirement

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Recommendations

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1. No amount of saving and investment yield can compensate for "loss of income" for 5-10-15 years. So early retirement is a mirage that is not worth pursuing. However, have enough liquid cash savings, so that you can afford to take 3-6 months break, take risks with your job / role / career, find a well paying opportunity that also aligns with your interests and happiness.

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2. Find out how much some one spent for a 100 / 500 / 1000 people wedding last year and then apply an Inflation rate of 12% when planning for future marriage expenses. (Not same as Official inflation figures). Or use Physical Gold at MCX as a store of value for the Marriage Corpus, which you can sell partly for the marriage expenses and partly convert to Jewellery. You could also start a monthly SIP for MCX Gold through milliGOLD.

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3. Retain the two flats or sell and repurchase them in a better locality if necessary and keep them as a "worst case pension income" for Age 60-80.

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4. Purchase the new property with a Mortgage Loan (Forced Saving, Reducing real value of EMI, Increasing Value of Property)

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5. Keep not more than 30% of your Assets in the Financial Markets. Use passive funds such as NIFTY 50/100 to hold long term. Use portfolio management of equities to book profits frequently and move the gains to real assets.

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6. Investing in a neighbourhood Nursing Home / Clinic / Medium Size Hospital / Montessori School / CBSE / ICSE School etc will ensure that you hold and grow your wealth in long gestation assets that have real utility value over 20-30 years. This will de-risk your "post retirement lifestyle" from the effects of Inflation and risks of Financial Markets.

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Summary : Being prepared for Black Swan Events, Geo-Political risks and Eroding Value of Money over the next 20-30 years is the key to your long term planning. Over Dependency on FInancial assets should be avoided and shift focus on creating assets with long term utility value.

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SFF ## (Male, 42, CTC Rs 2 Lacs), is working for a private company in a Tier 3 Town. His father is a retired government servant and mother is a house wife. He lost his wife recently and his daughter is studying in a residential school. They do have a own house and live as a joint family. The saving potential could vary from Rs 2000 PM to Rs 5000 PM.

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Recommendations

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1. Buy Pure Term Life Insurance for at-least Rs 10 Lacs. Buy mediclaim policy for self and daughter for Rs 3-5 Lacs.

2. Save and accumulate Gold every month as it is inflation proof and can be used to make jewellery at the time of marriage. Part of the accumulated gold can also be sold in future to pay college fees for Daughter (We wont sell Gold for ordinary expenses and hence protects our savings from our own spending habits)

3. Recommended Blog Link (regarding the pros and cons of various long term saving options (5 to 10 years)

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SFF ## (Male, 31, CTC Rs 12 Lacs) is recently married and is expecting a baby soon. His parents are from modest backgrounds and they live in a rented accommodation in a metro city. Sister is well settled. His net worth is currently negative. After all expenses and EMIs, he believes that they could easily save Rs 30000 PM but have not saved anything till date. Wife has own business with fluctuating income. He also does some part time work and has project type income once in a while. His goal is to own at-least two houses (One in City and One in Native) and accumulate funds for Child's school admissions 4 years from now. He also plans to accumulate enough surplus to be able to do own business on full time.

 

Recommendations

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1. Buy Term Life Insurance of Rs 50-100 Lacs. Ensure parents are added to Medical Insurance given by Company.

2. Buy a DTCP Approved Plot using a land loan and start paying EMI, which is a good saving method which will become useful later for building your own house. Even if the plot is far away, it can be sold to buy something closer to the city as and when you can afford a home loan.

3. Could allocate Rs 5K to 6K in an index fund (Example NIFTY 100) for long term Investment (10-20 years).(20% of Saving Potential)

4. Whenever bulk amount is available (From part time business), invest in Gold bars (Physical or SEBI Approved Gold stored in Exchange Locker). This can be sold later when there is a need for down payment for property purchase or for expanding the business.

5. Save using Bank RD or Gold Investment Plan for 4-5 years for Child's school admission needs.

6. Most Important : Since saving discipline is the biggest challenge, immediately set up a Standing Instruction to move Rs 30000 PM from your salary account to another unused bank account at the beginning of the month. This accumulation will become useful as an emergency fund and as a down payment for DTCP approved plot. This account can also be used for setting up Bank RD, SIP e-Mandate for Gold Investment Plan, NIFTY 100 Index fund etc.

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SFF## is a farmer's son, passing out of Post Graduation (Tech) this year. The family has a debt of Rs 10 lacs taken from local sources for Sisters marriage. In addition he has taken an educational loan of Rs 5 Lacs. They have their own house in a small town / village, and the market value of the independent house is Rs 40 lacs. Debt repayment is his primary goal. If he gets in to a MNC with a CTC of Rs 15-20 lacs, he may need more advice on how to save, create assets and invest surplus, but as of now, he is expecting a job in a Metro City like Bangalore or Hyderabad which might pay him Rs 3-5 Lacs per year.

 

Recommendations

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1. To set up a separate counselling session at SFF if he gets an offer for Rs 15-20 lacs from an MNC.

2. Till then, accept any tech industry job that pays Rs 3 to 5 Lacs and start his career.

3. There is good debt and bad debt. High Interest loans from local money lenders is a bad debt. Personal Loans at 18%-24% from NBFCs is also not recommended. Avoid using credit cards. 

4. Consider taking a Loan Against Property (LAP) of Rs 15 Lacs from a nationalised bank at a low interest rate of 7 to 8% and 15 year tenure (Approx EMI of Rs 15,000) as soon as he completes 3 months in his new job (Payslip + Bank Credit). Use this loan to settle the local high interest money lender loans and also his educational loan

5. Learn to live within Rs 10K to 15K in the city, and pay the EMI of Rs 15,000 for the LAP.

6. Buy Pure Term Life Insurance (25-50 Lacs) for self and Medical Insurance (5-10 lacs) for family.

7. Grow his income by continuously learning and enhancing his skills in the tech field.

8. Setup Counselling Session with SFF after 2-3 years or when he gets a better job with higher CTC.
    

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SFF## is native of a Tier 2 town. His father retired from government service and is doing some business now. Sister is married, brother is working. He is aged 25, graduated engineering 4 years ago, works for a Metro city based Tech company in IT Security with a CTC of Rs 6 Lacs. Because of WFH due to COVID, he has been able to live with his parents (they have their own house) and create surplus over the last 2 years. He has already cleared his educational loan and is now debt free. Even if he comes back to the city, his income-expenses will be approximately 1.5-2 lacs per year. He has already invested in Insurance policies and mediclaim and is considering investing in market based index funds. His stated goals were to retire early with a corpus of Rs 2-4 crores, so that he can stop working, buy at-least 1 or 2 houses in the city (One for living, one for renting) and maybe plan a foreign trip.

 

Recommendations

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1. Rs 1000 PM in 1980 was like Rs 10,000 PM in 2000 and Rs 100,000 PM in 2020. So a corpus of 2-4 crores after 20 years, may not mean much. So it is better to plan for a corpus of Rs 20-40 Crores.

2. Working in a job (that you don't love) for 15-20 years, just to save and invest enough so that you can retire early and do what you want, is not the right approach. Being stagnant (with nominal yearly increments) on the income side, and hoping to retire early just by "investment activity alone" is not a dream but a mirage and an illusion and can never be achieved. You need to give equal emphasis on "Income Growth", "Asset Creation" "Market Investments", and "Happiness Growth". 

3. Finding something that you love to do and earning a good income - need not be mutually exclusive. Many people have grown their income 5-10 times, just by finding what they love to do and excelling in it. Creating surplus cash funds and appreciating assets, will allow you to take risks with your career, change roles / jobs / profession / start a business and eventually find a way to earn a lot of money while also doing what you love to do. 

4. There is good debt and bad debt. Taking a home loan or land loan (for the 1st or 2nd house in a metro city) is good debt. It creates an appreciating asset, adds to your net-worth. We won't sell property or Gold for ordinary expenses and won't discontinue the EMI even in difficult situations. Physical Assets can be very useful as a collateral for future use. For example you can get 100 Lacs working capital for a business, with a collateral at a low interest of 8%, whereas without collateral, the interest rates will be 14-16%. However, it is not advisable to invest in a 3rd or 4th house or more than 1-2 kgs of Gold.

5. A very high level of discipline is required to hold on to (without breaking) and consistently keep adding to market investments, across various stages in life (particularly after marriage and children). Also the risk of not being able to exit a market investment at a time of your choice (in order to wait through a cycle) should be kept in mind. So invest in the market only the balance surplus, after allocating to critical goals like insurance, 1 or 2 houses and accumulating some amount of physical gold for the use of Children / Wife. For short term goals of 2-3 years, it is better to invest in bank deposits and RD (but not more than Rs 5 lacs per bank)

6. Index funds are passive funds, whose returns mirror the overall market. Be aware that their long term returns may not be very high and short term returns could even be negative. For example NIFTY50 grew from 1500 to 17000 in 22 years. Gold also grew from Rs 400 to Rs 4800 during the same period.

7. If you are looking for "Better than market" returns, you need a fund manager who is good in Equity portfolio management. Choose a brand and an equity fund that has a good long term track record over 7-10 years.

8. Make that Foreign Trip soon. If necessary take a personal loan at 12%. "Waiting to travel and enjoy life, after working hard and saving for a few years" is a mirage. Prices of flights and hotels will keep going up.

 

SFF## (Aged 28-34) works in the IT industry with a CTC of Rs 12 Lacs. He is recently married and has no children. They live along with their parents in an independent house, in a metro city, which was bought recently with a home loan. Their net-worth (Assets - Liabilities) is currently positive. Their current annual surplus (Income-expenses) is approximately 30%. They already have bought Pure Term Insurance and Medi-Claim policy for their family.

 

Recommendations

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1. To start saving for the College Fees Fund for their Children with a 15-20 year outlook by choosing Equity Focused funds. Select a brand that has a good long term track record over the last 7-10 years. Should have the discipline to let this investment grow, across market cycles. (without breaking or discontinuing it.

2. To start saving for the School Admission Fees of their Child, in the form of Bank RD or in the form of GOLD for the next 3-5 years. Stock Markets and Mutual Funds might be too risky for such a short tenure of 3 years and if the markets are down when the money is actually needed to pay admission fees, then one cannot time the market for exit.

3. To choose a Personal Loan that offers 12% or better, for a 5 year tenure to Invest in the Family Experience and Memories of a Foriegn Trip. This is better than saving for 5 years and then finding that the prices have gone up much more. 

4. To choose a Car Loan that offers 8% or better for a 5 year tenure to invest in the Family Experience and Memories of road trips.

5. To start accumulating Physical Gold (Goal 500 grams - 1 Kg) over the next 15-20 years to be used for making Jewelry at the time of Children's marriage.

6. To aim at growing income by at-least 40-50% every 3-5 years, by taking challenging roles and enhancing competencies.

7. To have an emergency contingency fund of at-least 5 lacs, so that one can go without salary for a few months. BANK RD / FD / Physical Gold are the asset classes that can be considered for this.

8. Take a land loan for a DTCP approved plot (Layout with 30-40 feet road), forcing oneself to save, creating an appreciating asset that can be sold after 10/15/20 years or in case of emergency.

 

SFF## (Aged 40-50) and his wife are self employed, live in a metro city with an annual income of Rs 15-20 lacs. They have a 14 year old son and 10 year old daughter. Their net-worth (Assets - Liabilities) is currently negative. They live in own house (owned by parents) and also have a plot of land in the same city. Their current annual surplus / deficit (Income-expenses) is close to zero. They know how to use credit cards for short term cash flow management by paying the full due amount before due date.

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Recommendations

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1. To construct an independent house on the plot they own, by taking a home loan for 8-10 years, thereby a) save tax on home loan interest b) force themselves to save as EMI which they can't discontinue c) create an appreciating asset whose loan will be completed within 10 years d) create a collateral that can be used to pledge and borrow for further post graduation expenses and marriage expenses of daughter.

2. To purchase Pure Term Insurance of Rs 50 Lacs each (Husband + Wife). Also purchase Mediclaim policy with Family Floater of minimum Rs 10 Lacs.

3. To start saving for the college fees of their son, in the form of BANK RD or in the form of GOLD for the next 3 years. Stock Markets and Mutual Funds might be too risky for such a short tenure of 3 years and if the markets are down when the money is actually needed to pay college fees, then one cannot time the market for exit.

4. To start accumulating Physical Gold (500 grams to 1 Kg) over the next 10-15 years to be used for making Jewellery for marriage.

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SFF## (Male, aged 30, with a house-wife and school going kid, earning Rs 30,000 PM), approached me after my talk (in a BPO Company) and asked me for my second opinion. He had already been advised by some "expert", to invest Rs 3000 PM in a mutual fund SIP or a portfolio of stocks. He said, his plan is, every time it accumulates to about Rs 1 lac, he will use that savings to fulfil some of his dreams. He was also under the impression that market investments could augment his income from time to time and help him bridge the gap between expenses and income. In a world were corporates were giving very small salary increments every year, he thought investing in the market is a smart way to enhance his income and fulfil his dreams.

I could not agree or disagree with his approach, without knowing more about where he is in his financial journey. So I dug deeper. This is what I found out.

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1. He had still not bought Life Insurance to protect his family. No one told him about low cost Pure Term insurance and how it is cheaper and better than ULIPs. 

2. He sends his child to a low cost matriculation school. No one advised him that a better school for the child is more important than investing in stock markets. 

3. What are the things he need to do, to enhance his skills so that he can grow faster in his career and earn more? Does it require him to invest a bit on his own development? Well, he had never thought about "investment" in this way.

4. He had not bought any Jewellery for his wife or kid since marriage. And his wife is very upset about it.

5. His parents have lived all their lives in rented houses in Tier 2 / Tier 3 towns and they yearn for a own house in the city. No one advised him how he should take a land loan and start paying the EMI, thereby forcing himself to save and also create an appreciating asset in that process. He could build a house on it, or sell it and use it as a downpayment for a flat, at some future point in time, as and when he can afford the home EMI.

6. No one told him that a Private University education for his child 10 years from now would probably cost Rs 50 lacs. And the kind of saving instruments he could use for that, so that it is free from financial market risks, appreciates well, forces him to save and also ensures that he won’t sell it for ordinary expenses.

 

Now tell me, Is it really ethical to advise him to put 100% of his saving capacity in the financial market that is subject to market risks? Something that is easy to discontinue, break and spend? Is it ethical to give him the impression that market investments can augment his income and help him achieve his dreams, which he otherwise cannot achieve in a middle class salaried job?

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SFF#1 is the reason why we started one-to-one personalised financial counselling for our members at SFF