Goal Planning For A Middle Class Indian

Rahul, 31, is a middle level manager for an IT company. He earns a salary of 85,000 per month net of taxes. He and his wife Radhika were recently blessed with a daughter, Gauri. Radhika has quit her job as a middle manager in a recruitment firm and plans to stay out of the workforce for the next 2 years. Rahul has recently started a home loan EMI of Rs 25,000 per month and a car loan EMI of Rs 8,000 per month. He expects to get an annual increment of 10% every year and a year-end bonus of Rs 250,000 3 months down the line in April 2016. Post his monthly spends and EMIs, Rahul is left with a surplus of Rs. 18,000 per month. How should he go about planning for his goals at this stage?

Money would certainly top the lists of “stressors” for most middle income professionals like Rahul! Adding structure to our savings and future goals can help alleviate this stress.

To begin with, Rahul should understand that Goal Planning isn’t a “onetime activity” but rather an incremental process that builds out over the years as incomes and surpluses evolve. Making a start is what really counts.

Like most of us in today’s inflationary era, Rahul faces a dilemma on how best to allocate his monthly surpluses. Let’s help him out!


Step 1: Broadly Defining his Goals
Rahul could begin by broadly penning down his long and short term goals on paper. For instance:

Gauri’s higher studies
A comfortable retirement
Saving taxes
Prepaying his home loan
Provisioning for emergencies
Upgrading his car
Planning a family vacation

And so on…


Step 2: Prioritizing His Goals Sensibly
It’s of vital importance to use common sense to prioritize goals wisely in order to create an appropriate balance between current lifestyle and future goals.

Some goals could be deferred depending upon the need of the hour. Rahul should postpone his car upgrade and family vacation by a year or two to focus on his more pressing needs. A smart strategy would be to whittle down the list to just three or four goals initially, so that the process of getting started seems less daunting! For instance:

1. Create an emergency fund (as he’s the sole earning member for now)
2. Save for Gauri’s higher studies (since it’s an important long term goal)
3. Start creating a Retirement fund (since he’s got 29 years to go, and he could use compounding to his advantage)
4. Prepay home loan (since the loan is in its nascent stages, he could save lot of interest)

Step 3: Doing the math - making his goals “SMART” by factoring in Inflation & Compounding

Financial Goals need to be “SMART”, that is Specific, Measurable, Achievable, Relevant and Time Bound. As a wise man said – “A Goal without a plan is just a wish”! Rahul’s SMART goals could look like this:

• Create an emergency fund of Rs. 1.3 Lakh in two years
• Save up Rs. 5 Lacs (in today’s terms) for Gauri’s college tuition in 18 years (approximately 23.5 Lacs when Gauri turns 18, assuming 9% inflation)
• Start putting together a retirement fund for himself and his wife, with a target year of 2046 and a target amount of 10 crore (although this may surprise you, this seemingly huge amount would suffice for today’s equivalent of Rs 80,000 per month post Rahul’s retirement!)
• Prepay home loan by 2.5 lakh (using the yearend bonus) in April 2016, which would save lead to interest savings of 12 lakh

Step 4: Select Appropriate Products and Make a Start!
The final step is where many of us falter. Investment products need to be mapped to goals depending on time horizon and liquidity requirements. Most of us just blindly purchase insurance policies instead! Rahul’s product selection could look like this:

1. The emergency fund needs to be highly liquid and ready in 24 months, so risky products should be avoided. Rahul could start a 12 month SIP of Rs. 5000 in a short term debt fund, or a bank RD for this goal.
2. A monthly SIP of Rs. 3000 in a mix of blue-chip and midcap funds could be started for Gauri’s education. Assuming a 12% CAGR, this small amount will add up to 23.5 Lacs in 18 years.
3. For his 10 Crore retirement fund, Rahul should invest in aggressive products with the potential to deliver 14% CAGR (such midcap funds). Due to the magic of compounding, an investment of just Rs. 20,000 per month for 29 years would suffice! Since Rahul has Rs. 10,000 per month left over after planning for the first two goals, he could start with this amount and aim to build it up systematically.
4. An SIP in an ELSS (Equity Linked Savings Scheme) for his retirement could help Rahul save taxes alongside and achieve two objectives simultaneously

Thereafter, Rahul needs to track his progress and re-assess his situation every year – and he’ll be en route to Financial Freedom in no time!