To say that we should plan our finances well is just to state the obvious. However, in spite of this knowledge, most of us do not put in the small amount of effort required to plan for the financial future of self and our families – how many people do you know who have bought a house without a home loan or sent their children for expensive studies without education loan by simply saving in advance? We would plan a weekend recreational trip much more than most of our major financial events of life.
Probably it is the anticipated drudgery of planning or the fear of confronting requirement of large financial sums that make us postpone any sort of long-term planning, till it is right in front of us and can no longer be postponed. However, if we put in just a little bit of effort on a couple of lazy Sundays, we would be able to see the merits of planning for our life events in advance. See the table below which illustrates that if we plan in advance, we would not only save a lot of money but be more confident to face the big event:-
|Financial Goal||When to occur||Present cost||Future cost||SIP required to fund the amount||Alternate funding if not saved regularly||Money saved vis-a-vis loan, even after tax benefits if any (30% tax bracket assumed)|
|Child’s Post Graduation||10 years later||10 Lakhs (5 Lakhs per year for 2 years)||Rs 25.93 Lakhs @ 10% per year of education inflation||Rs 12,977 per month for 10 years||Education loan of Rs 25.93 Lakhs @ 12% with EMI Rs 36,288 for 10 years||Rs 8.75 Lakhs (Education loan of Rs 25.93 Lakhs @ 12% with EMI Rs 36,288 for 10 years)|
|Own house||10 years later||Rs 70 Lakhs (Rs 20 Lakhs available now)||181.56 Lakhs @ 10% per year of property inflation||Rs 59,762 per month for 10 years||Home loan of balance @ 9% with EMI of Rs 1.21 Lakhs for 15 years||Rs 69.03 Lakhs (Home loan of balance @ 9% with EMI of Rs 1.21 Lakhs for 15 years)|
|Daughter’s Marriage||10 years later||Rs 20 Lakhs||Rs 35.81 Lakhs @ 6% per year of marriage inflation||Rs 16,138 per month for 10 years||Personal loan of Rs 35.81 Lakhs @13% with EMI of Rs 53,468 for 10 years||Rs 28.35 Lakhs(Personal loan of Rs 35.81 Lakhs @13% with EMI of Rs 53,468 for 10 years)|
In the table above, we have assumed that your money in equity mutual fund Systematic Investment Plan (SIP) will grow at 12% per annum. Remember that in equity MFs, such returns beyond just one year of investment are fully tax-free. Thus, by a very preliminary planning in advance, choosing the right course of action and executing it, you save on large amount of interest. In addition, by systematically planning it, you see the amount getting accumulated and gradually gain confidence about meeting the commitment, thus reducing your anxiety and stress about the financial need.
Inherent in our above analysis is the need for a change of attitude. Over a period of time, we have taken it as a fait accompli that on occurrence of a big financial event, we will go ahead and take a loan and pay EMIs for a long period. Thus we commit ourselves to a stressful life leading up to the event as we do not have the money ready and thereafter, the stress of the EMIs for a long period due to the loan taken. It is time we reversed the cycle by planning in advance and accumulating money through a financial instrument we are comfortable with. Do you know that if you take a home loan of Rs 50 Lakhs for 15 years at 10.15% rate of interest, you pay a total interest of Rs 47.26 Lakhs, thus actually paying back Rs 97.26 Lakhs? This inflates the real cost of your house. Even if you get the highest tax benefit (of 30%) on this loanon interest, you still pay Rs 33.08 Lakh as net interest on this loan. Probably, it is time you changed your way of meeting your financial goals by planning in advance so that you plan to succeed rather than plan to fail.