The human mind is normally biased towards the context that it sees for itself. I understand this well as I am a serious student of management and behavioral science, but still fall prey to it from time to time. When I was speaking to one of my blog readers today, she said that while my posts were quite informative, my examples always centered around people who are having about 10 years to retire etc. There is a point she has in this, though a lot of my case studies do have people with younger profiles.
Anyway, since I wanted to do another case study on FI, I have now decided to change it from a personal example to one of people who I know quite well. Except the change in names all the data is factual. These are as follows:-
- Ravi is 35 years old and lives in Kolkata with his wife and 2 children. He is in a stable job but would like to know about his FI number.
- At present Ravi owns a home through loan for which he is paying about 5 lacs a year. He needs to pay for another 10 years.
- His children are 3 and 6 years old. Ravi wants to plan for the elder one to be an Engineer and the other one to go for some graduation in an attempt to try for IAS etc.
- His estimate of children’s schooling and other expenses is to the tune of 3 lacs per year.
- His other expenses are 5 lacs per year today.
In order to figure out his FI number, Ravi will need to identify the different goals and estimate the expenses for these in today’s terms. Here is how he can go about it in a simple manner.
- Retirement expenses, assuming he lives till 80 and current expenses are X will be 45X. Note that X here is 5 lacs.
- Schooling for both children for 12 years ( actually 14 for the younger one but let us keep it simple) is 0.6 X x 12 or 7.2X.
- College for older child doing Engineering is 3X
- College for younger child is 2X
- Marriages for both children are 3X each, total of 6X
- Foreign vacations 4 times will be 4X
- Asset replacement over the next 45 years is assumed to be 6X. This includes buying of 2 cars during Ravi’s lifetime.
- Home loan repayment will amount to 10X
Now if we add up all of these, we will see that the FI number Ravi will be looking at today is 83.2X. Putting back the value of X we get the FI number for Ravi as 4.16 crores. Many of you will think that this is a very low figure but remember, this is the money he needs today. Obviously, this amount is going to be invested and will keep growing as Ravi continues to withdraw from his investments for the various needs.
Getting back to reality now – Ravi did not have 4.16 crores or anywhere close to it. He had about 1.4 crores which was actually quite good for a 35 year old. I told him that he was 1/3 of the way there and with some good plan he may be able to make it in the next 10-15 years or so.
Which really raises another pertinent question – how does the FI number change with time? Will it reduce or grow larger? Think about it and figure it out for yourself. I will soon write another post on the same.