I received a lot of queries on my last post and most of them asked the same question – why were my regular expenses such as food, utilities not among the top expenditure heads? There are two reasons for this seeming anomaly. Firstly, when the total expenditure is high the % spent on food, utilities will always be low. For example even if you spend 1 lac on food annually and your overall expenditure is 20 lacs then the figure is just 5 %. Secondly, if you take away expenses such as rent and children’s education, then it will be one of the top expense heads.
While most people focus on goal based investments as a strategic direction, and are largely correct in doing so, a far more pertinent concept for the short term is to understand the cash flows for the year. Your cash inflows depend on your earnings and your outflows will be anything that you spend or invest. Remember that cash inflows are only those which are impacting your bank accounts. So rent from a property you own is a cash inflow but the appreciation of your property value is not. Yes, if your property value appreciates your assets increase but you are unable to utilize this as cash for any of your expenditure or investment.
Interest from your PPF is a little tricky. As long as it only accumulates in your account, it cannot be treated as cash inflow. Once you withdraw some amount from your account then it becomes a cash inflow. Similarly FD or FMP maturing or any money realized through sale of an asset is cash inflow. While I will look into a generic model later on, let me outline the cash plan of my own over the calendar year 2016.
The major elements of cash outflow and how I plan to meet those through relevant cash inflows are as follows:-
- Regular household expenditure annually will be about 8 lacs. This includes insurance but does not include rent, children’s educational expenses and investment. I hope to meet this through following:-
- Tax free bond interest of 2.1 lacs
- Dividend from MF of 1.3 lacs
- Dividend from stocks of 1.2 lacs
- Capital gains from FMP will be about 5 lacs, after reinvesting the principal amount in other debt funds.
- The expenses for my son’s college education, taking into account the likely increases BITS will have is 3.5 lacs. This will be met as follows:-
- Current balance in his account for this semester is 50 K
- The next semester fees of 1.5 lacs each will be due on 30th June and 31st December. I have 2 FD of equivalent amount maturing a week before that. The money will be transferred to his account from which the fees will get paid.
- Rent for my Hyderabad apartment is 3 lacs. This will be directly paid every month from the receipt of our Chennai apartment rent.
- My major fresh investments are in the 2 PPF accounts for me and my wife amounting to 3 lacs, 5 lacs in MF and about 2 lacs in stocks for my wife. The plan for meeting these 10 lacs are as follows:-
- I estimate my active income through Consultancy earnings to be significantly more than 10 lacs, so normally this will not be an issue.
- In the unlikely event, this is an issue I will use the principal amounts of some FMP that will mature in 2016 to meet this.
As you can see from a cash flow planning perspective I have pretty much everything covered. However, in real life surprises can always happen and some unlikely expenditure of a high amount can never be ruled out. I have covered for the same through these :-
- My active income is likely to be more than what I have estimated here.
- I can withdraw money from my PPF account if there is a need.
- Avoid renewing the principal amounts of FMP maturity to have it available for an emergency.
Note here that apart from the active income amount, the rest is pretty much guaranteed. Theoretically the dividends from MF and stocks may not be guaranteed, but I have been getting these for years now and do not feel there is any real risk here.
In the next post I will cover how you can plan a cash flow model of 2016 for your own situation.