Is your money well managed?

Ajay Batra is 30. He is employed with a multi-national company in Gurgaon. He earns a good salary but doesn’t know how to channelize it effectively. He is a typical clueless investor who is busy with his career and family but has no idea how well his money is working for him. I was analysing his financial situation and thought of sharing some basic lessons that every professional (and his/her family) should be aware of.

Cost of delaying retirement planning: Ajay’s current monthly expenses are Rs. 50,000. To maintain his current lifestyle he needs to build a corpus of Rs. 4.25 crores to sustain his retirement phase for 20 years i.e. from his age of 60 to 80. To build this corpus, Ajay would have to invest only Rs. 13,800 per month in equity oriented investments (or any other giving a rate of return of 12% per annum) over the next 30 years.

If he delays his retirement planning by 5 years i.e. he starts saving for retirement when he is 35, he would have to shell out Rs. 25,000 per month for the remaining 25 years. By delaying his retirement planning by 5 years, he is contributing additional 25 lakhs for the same goal! Well, that’s a lot of money. I am sure Ajay can buy himself a world tour package with that money, soon after he retires.

Cost of choosing a wrong asset class: Ajay wants to accumulate Rs. 20 lakhs in today’s value to fund his son’s professional education which would cost 65 lakhs by the time child is 18 years of age and ready for higher studies. To achieve the goal, Ajay would have to invest Rs. 7,400 per month for the next 18 years in equity investments like mutual funds, blue-chip stocks or ETFs, which are likely to give a return of around 14% CAGR. If Ajay had invested in fixed deposits or traditional insurance products yielding around 6% to 8% for this long term goal, he would have invested Rs.14,000 to Rs.16,000 per month.

By choosing the wrong asset class, how much additional money was invested to build the corpus of 65 Lacs? It’s 14 Lacs! Well, that’s a lot of money. I am sure Ajay can spend that amount on his son’s wedding, given a choice.

Cost of keeping money idle in savings account: Thanks to modern day lifestyle and lack of clarity in financial goals, monthly savings get accumulated in the savings account. One fine day investor wakes up to realize there is too much money lying idle in his account; he then either buys a car or a life-size LCD TV. And if someone is aware, he/she will fall prey to those touchy high-interest-savings-account advertisements by financial institutions.

Ajay has been maintaining a balance of Rs. 5 lakhs in his savings account yielding 3.5 to 4% over the last 6 years. Now if he keeps aside 1 lakh as an emergency fund in Savings Bank account and invests the remaining 4 lakhs in a fixed deposit or corporate deposit at 9%, he can easily earn an additional Rs 2.15 lakhs in 5 years! Again, that’s a lot of money that Ajay could earn simply by using a part of that money to engage a financial planner who would help optimize his investments, with tax advantages, on a regular basis.

Cost of buying wrong insurance products: Ajay is happy that he has 6 insurance policies and he pays the premium regularly, but the total life cover is only Rs. 15 lakhs and the premium outgo is whopping Rs. 75,000 per annum. Needless to say all of them are traditional policies with abysmal yields or ULIPs with higher charges. On doing his life risk analysis, it is determined that his need based insurance requirement is at least Rs 1 crore.

Given Ajay’s age his life insurance, a term plan with sum assured of 1 crore, would cost him no more than Rs. 25,000 per annum. He need not mix his investment goals with insurance. If his insurance premium cost is reduced to only Rs. 25,000 from Rs. 75,000 per annum, his annual savings of Rs. 50,000 for the entire insurance term can create a huge corpus that can be utilized for other financial goals.