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| Do you have your money map |
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Vipin Sethi, 30, a sales executive, got a major breakthrough in his career when he got a job with an MNC bank. His salary increased by 40% and went up to around Rs. 6 lakhs per annum. Vipin, with his wife Priya and their two children have arrived in life. Vipin bought a house and a car, funded partially through loans.
Sethis are thrilled with the breakthrough that has not only elevated their social status by many notches, but has upgraded their life style too. While enjoying this newly found glory, Vipin is often has a nagging concern whether he is saving enough for his future obligations.
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A lot of people are anxious about their financial well being in the future. I always recommend people to make a money map for themselves. It is based on a few assumptions alright, but nevertheless it provides a baseline to work and track upon.
This is how you do it…
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| Cash Flows |
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Take stock of your cash flows. How much do you earn? Take the amount that hits your bank account post tax and any other deductions. Include any other income that you have over and above your salary. Then take stock of your expenses including your annual vacation and festival shopping:
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| House Rent |
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| Electricity |
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| Children Fees |
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| Telephone bills |
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| Food & Grocery |
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| Vehicle fuel and maintenance |
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| Maid/Driver |
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| Maintenance Charges |
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| Entertainment and outings |
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| Shopping |
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| Others |
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| Checkout how much are you saving regularly including contributions to PF, Superannuation and any other monthly saving schemes. |
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Define your Goals |
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I asked Vipin to define his future financial goals. Like any other smart goals in life, specify the purpose, time horizon and the amount of money you’ll need. Following table details Vipin’s goals. You can use the same format to define yours:
| Goal |
Target Year |
Years to goal |
Amount at Current Value (Rs.) |
Amount at target year Rs. (@ of inflation of 6%) |
| Ajay’s graduation |
2022 |
15 |
500,000 |
11,98,279 |
| Ajay’s post graduation |
2026 |
19 |
600,000 |
18,15,360 |
| Yogita’s graduation |
2025 |
18 |
500,000 |
14,27,170 |
| Yogita’s post graduation |
2029 |
22 |
600,000 |
21,62,122 |
| Ajay’s wedding |
2031 |
24 |
400,000 |
16,19,574 |
| Yogita’s wedding |
2030 |
23 |
400,000 |
15,27,900 |
| Retirement Planning |
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Once you have taken stock of your financial obligations, you need to plan for your retirement. The key areas to look for are: do you have a place to live in; what are your expenses going to be; and how much you need to save, to support the retirement. Vipin plans to retire at 60. His current household expenses are Rs. 15,000 per month and an additional annual expense of Rs. 10,000 which totals to an annual expense of Rs. 190,000. He anticipates that on an average his expense post retirement may remain the same; children related expenses will go down while medical and travel related expenses may go up. |
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| Net Worth |
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Assume that your salary increases on an average by 10% every year and that you increase your savings by the same proportion. You can project your assets, expenses and net worth. Vipin’s monthly take home is Rs. 45,000. He is saving around Rs. 800 per month in PF and Superannuation and an additional Rs. 2,000 in a mutual fund through a Systematic Investment Plan (SIP). He has investments worth Rs. 50,000 till date. Table below shows how his net worth will build up over the years. In the next 14 years he will systematically build his assets and also clear his loans. But as he reaches mid-age with family obligations hitting him he will get into debt and have no corpus for retirement. It will also be probably too late to take corrective actions except for compromising on the goals or quality of life. |
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| Age |
Annual Income |
Annual Expense |
One time Expense |
Assets |
Annual Savings |
Net worth |
| 30 |
549,600 |
190,000 |
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50,000 |
33,600 |
83,600 |
| 35 |
885,136 |
254,263 |
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329,627 |
54,113 |
383,740 |
| 40 |
1,425,521 |
340,261 |
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896,879 |
87,150 |
984,029 |
| 45 |
2,295,816 |
455,346 |
1,198,279 |
1,982,224 |
140,356 |
924,300 |
| 48 |
3,055,731 |
542,324 |
1,427,170 |
1,527,851 |
186,813 |
287,494 |
| 49 |
3,361,304 |
574,864 |
1,815,360 |
310,494 |
205,495 |
-1,299,371 |
| 52 |
4,473,895 |
684,672 |
2,162,122 |
-1,104,636 |
273,513 |
-2,993,245 |
| 53 |
4,921,285 |
725,752 |
1,527,900 |
-3,232,705 |
300,865 |
-4,459,740 |
| 54 |
5,413,413 |
769,298 |
1,619,574 |
-4,816,519 |
330,951 |
-6,105,142 |
| 60 |
9,590,191 |
1,091,263 |
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-6,912,669 |
586,300 |
-6,326,369 |
| 70 |
0 |
1,954,286 |
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32,992,341 |
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-34,946,628 |
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| Although the situation above looks too gloomy, the solution to it is not that hard provided you act well in time. If Vipin increases his savings from Rs. 2,800 per month to Rs. 7,800, which is still just 17% of his income, and keep increasing his savings by 10% in line with increase in his income, the situation will be totally different (ref to the graph below) (I can also give a table as above if you want to carry it). |
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In the early years as incomes are flowing in regularly and in fact, in the current economic scenario, increasing rapidly, our view is blurred and almost certainly drives one to a midlife crisis. A bit of proactive approach and discipline can make all the difference.
The writer is CEO, Cornerstone Wealth Management
rattan.chugh@cstone.in
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