Saving for your own marriage or education? Here’s how

Our social norms and practices have undergone huge changes in the past decade or so and this is a continuous process. One area where this is seen quite starkly is how marriages are arranged and carried out today. In the older days the parents were most likely to find a match for their child, arrange the marriage logistics and of course pay for the same. Given the fact that people married relatively young, especially the women, it made sense to do this then.

Times have changed greatly now, especially in urban India. The incomes have increased manifold but so have the responsibilities of parents. Increased cost of school education, high graduation costs and not really being able to depend on children for the retired years like before has created a need for funding retirement to a much greater extent than ever before. Also, as children nowadays prefer to choose their own partners and have their own ideas about how the marriage should take place. In this kind of situation it makes a lot of sense for the children to plan for their own marriage expenses. Of course the parents will give gifts etc as per their financial bandwidth but in case there is a seriously expensive wedding, that needs to be planned by the child.

So, let us say you are just out of college and are in a job which pays you about 50000 Rs a month. How do you go about planning your life at 22, when many things are not really firmed up for the near term or far term? For example, you may want to do an MBA, may have ideas to start something on your own in a few years time or may have an idea of getting married in 6-8 years time. While you do not have to decide exactly on what course of action you want to follow, it will be important for you to invest from the beginning in a fairly disciplined manner. This will enable you to have the financial ability to do the spend when required.

How do you start? We will assume that your initial salary is 50000 a month and this will increase at 10 % every year. You should be doing the following:-

  • You really do not need insurance so do not spend on it. For debt investments your PF is adequate but as a matter of good habit open a PPF account and put 5000 every month in it.
  • With the above and your monthly expenditure you should still be able to invest 10000 per month in MF fairly easily. In case you can do more, all the better.
  • With every passing year increase this amount by 5000 Rs per month. This should not be difficult with your annual increments or job changes, if any.
  • Assuming you plan to work for 5 years before you need the money and it grows at 12 % every year how does it look?
    • Initial 10000 for 5 years will grow to 8.24 lacs
    • Next 5000 for 4 years will grow to 3.09 lacs
    • Next 5000 for 3 years will grow to 2.17 lacs
    • Next 5000 for 2 years will grow to 1.36 lacs
    • Final 5000 for 1 year will grow to 0.64 lacs
  • So in 5 years you will have a corpus of 15.5 lacs.
  • You will also have about 5 lacs in your PPF account

With this in place you can easily plan for your marriage or higher education. For example if you want to do an MBA from ISB the cost is about 30 lacs today. You can use part of your corpus and also take an Education loan. In case you are looking at funding your marriage, the amount in your corpus should be adequate for most weddings.

Now many financial planners will tell you that you must not put money in equity for 5 years etc. Do not listen to them at all. Firstly you are creating an MF portfolio which you may or may not want to redeem in 5 years time. So, strictly speaking there is no real need to think of it as 5 years. If you do not need the money, you just continue with the portfolio as normal. Just to motivate you a little more, if you keep investing 10000 for 25 years, at a return of 12 %, you will end up with 1.9 crores from just here.

I hope this has given all the new earners a lot of food for thought. You need to be in charge of your finances now. So far your life events have been largely managed and almost wholly funded by your parents. Now is the time to really chart out your own course and depend on your own resources for the same.

Once you make up your mind to do this, success is almost guaranteed.


A case study from recent AIFW post

It always surprises me a little to see the reactions of people in Facebook groups when a group member asks a simple query. Some members assume that the questioner needs to get knowledge by reading blog posts of some other members first, others advise him to go to a fee only financial planner and even give him a list, yet others tell him that one should just keep working and not think of retiring.

To come back to the recent query, here are the salient facts shared by the person who wanted advice on whether he will be able to gain Financial independence in 6 years:-

  • He has 1.2 crores in FD and another 30 lacs in equity etc
  • Can invest 20000 per month for next 6 years
  • Has a child in class 7, who should be going to college in 6 years
  • Has his own house and loans will be paid for by the time he is 50.
  • Current costs are 1 lac per month, 15000 for child and includes loan repayments.

Let me come to the question as to whether he will be able to be financially independent by the time he is 50. For this we will calculate his Financial Independence Number (FIN) in the following manner.

  • His base cost at 50 will be lower than 1 lac as child cost will be gone and so will the loan repayment. However, let us take it at 1 lac to take care of inflation etc.
  • For retirement of 30 years his cost will be 3.6 crores at zero real rate of return
  • For child higher education we can take 20 lacs
  • For asset replacement etc we can take 20 lacs
  • Total FIN therefore comes to 4 crores.

Fortunately, in real life we do not need to go with financial planner and/or calculators blindly and can use some experience and common sense. It is difficult to tell others what to do as they will have their own goals and ways. However, if I were in his place, I would be doing the following:-

  • As his child’s college education is 6 years away, I will put 10 lacs in an Aggressive Balanced fund like HDFC Prudence. This amount will take care of the 20 lacs that will be required for the child’s graduation.
  • I will redeploy the 1.1 crore left in FD to different types of Debt funds. Assuming a CAGR of 8 % this will grow to an amount of 1.75 crores.
  • His current equity investment will grow to 60 lacs if we take 12 % CAGR over 6 years.
  • 20000 SIP @ 12 % returns will grow to about 21 lacs in 6 years.
  • So at 50 years he will have 1.75 crores in Debt and 81 lacs in equity

Let us now look at deployment of corpus. In the first 10 years of retirement, his strategy can be the following:-

  • Interest from Debt portion will be to the tune of 14 lacs @ 8 % returns. This is definitely possible if he is into good quality Debt instruments.
  • As his child is in college and he is still relatively young, I will not reinvest this 2 lacs but spend it in discretionary expenditure such as travel or asset replacement.
  • At the end of 10 years, he will be 60 so the activities will reduce and on the balance his medical expenses may grow. I think an annual expense of 18 lacs will be enough. There is no need to calculate this by inflation formula – makes no sense at all to do so.
  • Assuming a 12 % return on equity his equity corpus will be 2.51 crores.

In the next decade his deployment can be as follows:-

  • Keep using the interest from Debt instruments and take out the remaining required amount from redeeming the principal.
  • Even after you finish the decade you will have some amount left in Debt instruments. I suggest you donate it to a charity of your choice.
  • Your equity investments would have grown to more than 7 crores by now and will be more than enough to last your life as well as live a legacy.

So to come back to the basic query – will you have enough to retire at 50? You bet you will. Now just shut out all the negative people with negative comments from your mind and go ahead with the plan. Honestly, if you are able to get the selection of instruments done on your own, you do not even need a Financial planner.

Will be happy to receive comments, feedback and criticism on the post.

My Financial independence state – An audit

Many of you who follow the blog will have an idea about my journey in life so far, but let me summarize for new readers. I was born and brought up in Durgapur ( West Bengal ), studied in St Xavier’s school, Jadavpur university and IIM Calcutta, worked till 2014 end in corporate world with 14 years plus at CXO level. Since then I am working in my own Management Consulting practice. I have 2 children who are doing Post graduation ( Rinki is in XLRI and is an Engineer from BITS Hyderabad) and Graduation ( Ronju is doing a dual course in BITS Goa). I have been financially independent since 2014 and thought it would be a good idea to share the stock taking which I did recently.

The interesting fact is that the last three calendar years 2014 through 2016 have been progressively the most expensive years of my life. This flies in the face of conventional wisdom which will tell you to be conservative on spending when you are no longer doing a regular job etc. When I took the plunge in 2014 end, my thinking was as below:-

  • My total expenses in 2014 was equivalent to 200 units in some scale.
  • If I left out children’s college education, the travel to Australia which we went for in October 2014 and my apartment rent in Hyderabad then the expenses would be equivalent to 100 units.
  • Now, my rent was getting covered by the rent of my Chennai apartment, I had a separate fund for my children’s graduation expenses and we would obviously not go for an Australian vacation every year.
  • Based on this it seemed reasonable that my expenses annually would be in the range of 100 units.
  • As my financial assets would generate more passive income than 100 units, I concluded I had achieved the holy grail of financial independence.

At the end of 2015, I was surprised to see that my overall expenses were in the range of 225 units. A closer examination revealed the following :-

  • Education expenses were higher as I had to pay two semester fees for my son instead of the one in 2014.
  • Expenses otherwise on my children were high, courtesy their being typical college students now. Also, Rinki took up a course for her MBA entrance preparations.
  • However, my other expenses were still below 100 units and this was managed easily through my passive income stream.
  • It thus seemed that my assumptions held true for 2015.

2016 was a completely different story though. My overall expenses shot up to 400 units and change. Analysis of this figure showed up the following:-

  • Educational expenses were very high in the year as Rinki got into XLRI and, after a long deliberation, I decided to fund her first year expenses. We could have taken a loan for the entire expenses but this seemed a better idea for us.
  • Other expenses of children continued to grow. I am fine with their having a good time in college as long as they have the right priorities.
  • Our travel increased a lot in the year – we took more vacations and also traveled a fair bit for Rinki’s admission process.
  • With the declining interest rates the cash flows of my parents got impacted adversely. I chipped in with a greater amount than normal this year.
  • We upgraded our timeshare and there was a one time cost of 1.7 lacs for this.
  • Furniture replacement with a new sofa set, Dining table and balcony chairs were an expense this year.
  • Purchasing a new Android tv, new internet connection, new phone for my wife and a recording set top box also happened during the year.
  • In summary, it was a year with great experiences and they often come at a fairly high cost !!

So what is the conclusion I arrived at from all of this? Well, 2016 was definitely not a typical year and I do not think it will ever repeat in our lives. With Rinki getting the rest of her course done through bank loan, asset purchases not really there except for a Fridge and lesser travel the 2017 expenses will be much lower.

At the same time, I am thinking whether my earlier estimate of 100 units needs to be upgraded to something like 125 units. I will write more on this when I do a post on the 2017 outlook for us.

Salaried = SIP? Read this case study

Since I wrote about not following SIP about a year ago, I have had many discussions in the blog and in Facebook groups such as AIFW on the subject. A lot of people have tried to convince me why SIP is a right method, despite the concept being completely inadequate for equity as an asset class. I will not go into the arguments or counter arguments as it has been done and dusted as far as I am concerned – if you are interested go through the different posts in the blog. 

However, the other important point many point out is the availability of money to take advantage of the drops in the markets. The argument goes like this – ” It is all very well for you as you have enough money to spare. We get a salary every month and if we do not put the money in SIP, we will probably spend it.” Now, I find it difficult to understand why any person cannot show some self discipline, but that is unique to each person. I was quite happy to see that a reader of my blog asked me a more pertinent question – she wanted to know how she could invest in MF more productively. Having done SIP for 2 years and read my posts she could see that there was enough case to not do SIP in MF.

To give some basic background, this reader lives in Mumbai and works in the advertising industry. Her monthly take home is about 1.5 lacs and she was investing 40,000 per month through SIP in 5 Mutual fund schemes. Over 2015 and 2016, she could see that her nearly 10 lacs invested in these funds have not done greatly. She could also see that there were several times she could have put in money, had she not been doing SIP. Now apart from MF, she also wanted to do 1.5 lacs in PPF annually. Based on this data, I have given her some alternative plans which she can look at in 2017.

  • Firstly she needs to fix the index levels aligned to her funds at which she wants to make a purchase. For example, in Nifty the right level currently will be 8000 and below. This may happen in Jan/Feb and a couple of other times in the year.
  • In order to have the money available, avoid putting in the 1.5 lac in PPF in the beginning of April.
  • As and when markets fall put in the money for MF buying. Look at having 4-6 purchases in the year.
  • She could just keep the money in her savings account but there will be a temptation to spend and also the interest is low.
  • A better way will be to put 12500 per month in PPF, unless you are buying MF that month. If the markets are high you can put more. For example, if you are clear that April is unlikely to be a good month for buying MF, put that amount in PPF.
  • In general, put your SIP amount in an Arbitrage fund with dividend option. You will get decent returns and can shift money from it to buying MF whenever needed.
  • Another way will be to put the money in Liquid fund or some other type of debt fund.
  • The above addresses the issue of parking your money, so that you do not get tempted to spend it. At the same time, you do not buy equity MF at the wrong time.

How has it worked out for the reader in this month? 

  • She understands that a level of 8000 or lower in Nifty will be a good buy for her large cap fund but at 8250 etc she is not interested to buy.
  • She has put the amount of 40000 in a Liquid fund along with the amount of 30000 which she used to save for PPF.
  • In case Nifty consistently stays above 8000 till February beginning, she will put the money once again in the same Liquid fund.
  • At the beginning of each month have an idea of the Nifty level at which she wants to buy. It is all right if it does not reach that level, she will avoid buying.
  • Worst case scenario can be for Nifty to go up consistently through the year. This is unlikely and even in such a case she is anyway taking a monthly call.
  • I think it is very probable that she will buy her units at Nifty level of around 7900 this month itself or the next.

It is a rather simple system which anyone can adopt. Remember, her salary is not an issue here – people having lower or higher salaries just need to scale the model down or up. Do you want to do this? Only you can answer that – if you want your money to work in a more productive manner, consider it seriously.

Financial freedom is the only goal I ever invested in

I think goal based investing has a lot of positives going for it, the most important one being it gives you a target to aim for. Without this, a lot of our investment actions can be distracted and lack coherence. However, while I have always had life goals in terms of how my family and I should lead our lives and what we will hopefully strive to achieve, I have never really invested financially for these goals. In fact, all of my investments in life on the financial front has been targeted towards only one goal – Financial freedom.

What does financial freedom mean to me and why is it the only goal for me? In very simple terms it has the following aspects inherent in it:-

  • I can choose to spend my time in a way that I choose. This may include “work” in the traditional sense of earning an active income, but that is not mandatory.
  • I do not need to do anything I am not liking, simply in order to earn money.
  • There is no need for me to monetize my hobbies in any manner. At the same time I am able to indulge in them to the extent I need to.
  • What about other goals like children’s college, paying for the home etc? Well, unless I am having enough funds for these I cannot consider myself financially free. Other goals are therefore, part of the overarching goal of financial freedom.
  • As an example, if I had to figure out the corpus needed at a very safe level for me at this stage of my life, it will probably go as follows:
    • Annual expenses of 8 lacs for 35 years = 280 lacs
    • 4 trips outside India @ 7.5 lacs = 30 lacs
    • Replacement of car and furniture over next 10 years = 30 lacs
    • Expenditure on children’s marriages = 50 lacs
  • The above comes to 3.9 crores in current financial assets. Note that this is very liberal in terms of expense estimates and quite conservative in terms of returns as I am not expecting any real returns from my portfolio at all.
  • As my current financial assets significantly exceed this figure, it is quite realistic to say that I have achieved my goal of financial freedom.

One can, of course, argue that your corpus should be 10 crores or something similar before you choose to spend your time as you please. My simple question will be, how do you plan to spend the money? If you are earning as your annual expenses are very high or you are doing it for others in your family till they are able to take care of themselves, then you need to continue working. But, if you are doing it for leaving a legacy for your children, then I am not in that boat at all. I believe in giving a good education to children and supporting them to get started in life. However, by the time they are 22 or 24 years old, I completely expect them to be taking care of themselves. I have never expected my parents to leave a legacy for me, nor have I encouraged my children to feel that they will be getting any. Emotional attachment is lifelong, not to be confused with financial support.

So, if you were to arrive at a figure for your financial freedom what will it look like? Against that figure, how much have you done till now? What is your plan to achieve the shortfall and by when are you likely to get there?

If you are able to answer these questions then you are well on your way to achieving your own financial nirvana.

Financial independence is an imperative

Last week I got talking to an old friend of mine about the budget and the conversation soon turned to financial independence. Fortunately for both of us, we are financially independent though still actively earning though activities we love to do. I wanted to capture the summary of our conversation as I think it will help many readers of the blog.

In very simple terms, financial independence is a state where you do not need to work actively for generating an income. Note that this does not mean you should not be working – you may well do so and earn money out of such work. However, even if you were not working in a similar manner you would still be able to lead the life that you wanted to. So, contrary to what many people think, financial independence is not synonymous with early retirement. Of course, you better not think of early retirement unless you are financially independent but that is as far as it goes. You can be in a FI state and continue with your job and business for as long as you want. In my personal situation I am in a state of FI but I do take up consultancy assignments that are of interest to me. What I earn through this is either invested or used for charitable causes that are dear to me. However, I do not depend on this income to fund the lifestyle I have decided to have, now or in the future.

Many people ask me whether it is necessary for them to get to the FI state if their plan is to work till 60 or more. Surely you need to be FI only when you are no longer having an active income? This is unfortunately a fallacy and you need to understand this well. Let us look at some of the things that may create the need for being in an FI state as early as you can:-

  • You may be in a job or career that you do not like much. Your being in an FI state will enable you to look at options in a much bolder way.
  • There may be a passion you have which you want to convert into a business. Once you are in an FI state you will be able to take a plunge in a much easier manner.
  • In the private sector today job losses are an unfortunate reality. Your ability to cope with such a mishap is significantly more when you are in an FI state.
  • If something were to happen to you, the family is covered by insurance. It will however be a much better situation if you are in the FI state. Think of this as the ultimate insurance option that you can gift your family.

Now that we have established that being in an FI state is an imperative, let us see how we can get there. I will take an example of a person with a family of 4. Ravi is 40 years old with 2 children of 12 years. His details are as follows, to arrive at his FI figure.

  • Current expenses are 10 lacs per year. When his children go to an Engineering college it will go up to 18 lacs per year.
  • After they pass out the expenses will be 8 lacs per year.
  • All of the above are expenses in the current terms.
  • For being FI today Ravi needs 6 years @ 10 lacs, 4 years @ 18 lacs and finally 30 years @ 8 lacs. Here it is assumed that Ravi and his wife will live till they are 80.
  • So for Ravi to be in the FI state today he needs 3.72 crores in current money.
  • Now, Ravi may have about 2 crores totally, including his current value of PF accrued. This means he will need to accumulate an additional 1.72 crores to be in an FI state.


You can go ahead and calculate your FI number, compare it with your present portfolio and see how you are doing. Based on this you can then figure out a way to bridge the gap. If the figure appears large do not despair. The example given is a worst case scenario, assuming zero real rate of returns. If there is a 2 % real rate of return, the calculations change dramatically.

Financial independence is an imperative for all of us, irrespective of our life situation or for how long we want to work. In simple terms you will be able to enjoy a significantly richer and fuller life when you are in an FI state.

Cash flows in 2016 – A personal perspective

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.