Financial planning for young professionals: Making the best of earnings

Sep 23 2013, 14:52 IST
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Young professionals need to make a small contribution towards retirement planning to have a sizeable amount by the time they reach the age of 50. Young professionals need to make a small contribution towards retirement planning to have a sizeable amount by the time they reach the age of 50.
SummaryThis workforce needs to draw up the right financial strategy right from the beginning.

annual premium of Rs. 15000/-

Health Insurance

A comprehensive family insurance of Rs. 500000 will require an annual premium of Rs. 5000 approximately providing all the requisite facilities.

Purchase of House

This is the perfect time for Rahul to buy a house. With an annual income of Rs. 8 lakhs he can easily get a home loan of 5 x 7 (annual Income) = Rs 35 Lakhs. However Rahul should go for a house of about Rs. 25 Lakhs for which his contribution will be about Rs. 5 Lakhs as down payment that can be drawn from the savings he has made so far. The remaining Rs. 20 Lakhs can be taken as a home loan with an EMI of about Rs. 21000.

Daughter’s Future

Planning for the daughter’s future should be on the top of the agenda for Rahul now. This includes cost of higher education which is about 16 years away now and will require about Rs. 15 Lakhs as an approximate expense for any private college. Thus Rahul must start saving accordingly from this time onwards on a regular basis. Marriage of the daughter is a situation far ahead and the actual cost can vary drastically but it does require some disciplined savings from now onwards.

Retirement Planning

Rahul has Rs 2 Lakhs in PF for which he maybe contributing Rs. 20000 annually and it will grow to about Rs. 28 lakhs in the next 25 years at an 8% growth rate. However for life till about 80 years he shall need Rs 1.3 Cr. to keep up his lifestyle even after retirement. Thus he will have to increase his contribution towards this aspect through other retirement tools to about Rs. 80,000 per year.

Investment Planning for Rahul: By the age of 35 Rahul should have started dedicated investments to create a corpus required in later stages of life. He should expect returns at an average of at least 8 -12% on his investments. Therefore all his monthly savings of around Rs 8000 can be invested through SIPs. Additionally he can consider moving about Rs. 2 L from his low return (3.5%) bank savings account to a more liquid option that provides around 6% annually. The balance Rs. 1L left in the savings account must be invested as a lump sum in some debt/equity fund which shall earn a better annual return.

Tax planning: Rahul’s total tax liability is about Rs. 170000 annually. He must make

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