The S.M.A.R.T. Plan To Financial Independence
Mr. Nikhlesh Katariya, 36, is in private service and lives in Noida with his wife Mrs.Krishna Katariya, age 32, who is a housewife and has a son who is one year old. He earns a salary of Rs 2 lakh per month. After catering to his household expenses, Mr Katariya has a surplus of Rs 100,000 per month.
Mr. Katariya has currently invested across assets in self-use property and fixed deposits, besides a sum of Rs 15 lakh in liquid financial assets. His goal includes savings for any contingencies, an impending retirement plan after 23 years, a fixed amount for his son’s higher studies and marriage. He has no exposure in other asset classes, including insurance covers.
The financial planners from a boutique investment management firm Flexi Capital suggest that Mr Katariya should start by building an emergency corpus of Rs 6 lakh, which is equivalent to six months of expenses. This can be done by allocating his cash surplus in a liquid fund
On life insurance, using the human life value model, Flexi Capital suggests Mr. Nagi to take a pure term plan of Rs 30 million (Rs 3 cr.) for the next 23 years with a personal accident cover of Rs 10 million (Rs 1 cr.) and a medical insurance floater cover of Rs 2.5 million (Rs 25 lakh).
The expenses of these protection plans will be drawn down every year from the surplus generated every month
For Mr. Katariya to generate monthly income of Rs 2 lakh per month after 23 years, Flexicapital has suggested deployment of funds to equity as an asset class through diversified equity mutual funds, using the Systematic Investment Plan, popularly known as SIP, to the tune of Rs 1 lakh, which will be deployed monthly across different funds recommended by Flexi Capital’s unique proprietary model to benefit from the rupee cost of averaging model.
Flexi Capital has assumed an inflation of 6% p.a. as per the historical trends on inflation in the Indian economy and has assumed an internal rate of return (IRR) of 12% p.a. on the suggested investments.
In keeping with the abovementioned metrics, Mr Katariya will accumulate a corpus of Rs 100 million (Rs 10.31 cr.) at the end of 23 years. This amount is arrived after fulfilling Mr Katariya’s financial goal of his son’s higher education.
Our suggestion includes an inflation adjusted Systematic Withdrawal Plan as illustrated below:
If Mr Katariya follows the abovementioned plan as recommended, he will achieve his financial independence with a reasonable plan on retirement, kid's graduation, postgraduation, marriage and emergency funds or towards any unforeseen financial situation arising in the near future. Our model simply talks about a S.M.A.R.T. plan, which is Specific, Measurable, Achievable, Reasonable and Time-bound plan.
