Effective financial planning is essential for middle-class families striving for financial stability and growth. In this article, we will outline a comprehensive financial strategy for a newly married couple residing in Chennai, living in a rented 1 BHK apartment. The husband earns ₹50,000 per month, while the wife earns ₹40,000 per month. We’ll delve into practical steps and considerations tailored to their income, expenses, and financial aspirations, providing a clear path towards achieving their financial goals while managing their current lifestyle and future plans.
Current Financial Situation
Monthly Income:
- Husband: ₹50,000
- Wife: ₹40,000
- Total Monthly Income: ₹90,000
Monthly Expenses:
- House Rent, Current, Water, and Tax: ₹15,000
- Food and Groceries: ₹15,000
- Recharge, Cables, OTT: ₹2,000
- Entertainment (Movies, Dinner, etc.): ₹2,000
- Personal Cosmetics and Fashion: ₹5,000
- Total Monthly Expenses: ₹39,000
Remaining Balance:
- Income – Expenses = ₹90,000 – ₹39,000 = ₹51,000
Effective Financial Planning
Effective financial planning helps manage your finances to ensure stability and growth. It includes budgeting, investing wisely, and saving for future goals. For middle-class families, this process is key to balancing daily expenses with long-term financial security.
1. Budgeting and Expense Management:
- Track Spending: Use budgeting apps or spreadsheets to track monthly expenses.
- Adjust for Savings: Ensure that spending does not exceed the budgeted amount, and adjust discretionary expenses if needed.
2. Debt Management
- Use UPI, Cash, or Internet Banking: Pay all your bills and expenses using UPI, cash, or internet banking. This helps in maintaining control over your spending and avoids the pitfalls of credit card debt.
- Minimize Credit card Use: Avoid using credit cards for everyday purchases. Credit cards can lead to overspending and high-interest debt if not managed carefully.
Understand Credit Card
Avoid the temptation to use credit cards for convenience. Stick to using cash or digital payment methods to keep your finances in check and prevent accumulating unnecessary debt.
- Beware of High Interest: If you convert your credit card spending into EMIs, be aware that the interest rates on credit card EMIs can be quite high. While converting may seem like a good option to manage large expenses, the interest cost can add up quickly.
- Avoid Conversions: Even if you plan to pay off your credit card bill in full each month, it’s easy to fall into the trap of converting a balance into EMI. If unexpected expenses arise, you might find yourself converting balances, which will accrue high interest over time. This can result in significantly higher repayment amounts compared to your original spending.
3. Investment Planning
- Recurring Deposit (RD): Start an RD for disciplined savings with guaranteed returns. Allocate around ₹10,000 per month.
- Fixed Deposits (FD): After a year of savings in RD, Spend the whole 1.2 lakh(Exclude interest) in FD for safe, fixed returns. Plus Allocate around ₹10,000 per month in savings and Create another FD for 1.2 Lakh.
- Life Insurance Corporation (LIC) Policies: Invest in LIC policies for long-term financial security. Allocate around ₹5,000 per month. Consider working with LIC agents to find the best LIC plan with reduced premium amounts.
4. Savings for Goals:
A) Short-Term Goals:
- Gold Purchase: Plan to buy gold as a hedge against inflation and for future security. Allocate around ₹5,000 per month.
- Land/House: Save for down payment or investment in property. Allocate around ₹7,000 per month.
B) Long-Term Goals
- Retirement: Start a retirement fund with a smaller monthly allocation of around ₹5,000.
- Children’s Future: If planning for children’s education or marriage, allocate around ₹5,000 per month.
5. Emergency Fund:
Aim to save at least 3-6 months’ worth of expenses in a liquid savings account. After allocating funds for investments and savings goals, you can set aside an additional ₹6,000 per month for an emergency fund. This approach will help you build a reserve of ₹1,17,000 within a year, ensuring you are prepared for unexpected expenses while maintaining financial stability.
After 5 Years of Saving, Buying a House in Sholinganallur
After consistently following the financial plan for 5 years, the couple will have accumulated significant savings to invest in a new home. Here’s how their savings plan can translate into purchasing a 2 BHK apartment in Sholinganallur, Chennai, worth ₹80 Lakh.
Savings Accumulated Over 5 Years:
Recurring Deposits (RD): ₹10,000 per month for 5 years at an average interest rate of 6% per annum.
- Total Deposits: ₹10,000 × 60 months = ₹6,00,000
- Estimated Interest Earned: ₹1,02,000
- Total RD Savings: ₹7,02,000
Fixed Deposits (FD): ₹10,000 per month for 5 years invested in two FDs of ₹1.2 lakh each, with an average interest rate of 7% per annum.
- Total Deposits: ₹10,000 × 60 months = ₹6,00,000
- Estimated Interest Earned: ₹2,32,000
- Total FD Savings: ₹8,32,000
Gold Savings: Investing ₹5,000 per month in gold, with an average annual appreciation of 4%.
- Total Investment: ₹5,000 × 60 months = ₹3,00,000
- Average Appreciation: 4% per year
- Estimated Value of Gold after 5 Years: ₹3,00,000 × 1.22 (4% compounded annually) ≈ ₹3,66,000
Down Payment Savings for Property:
- Total Land/House Savings: ₹7,000 × 60 months = ₹4,20,000
Total Saving Over 5 Years: ₹23,20,000 (23 Lakh)
With a Inhand cash of ₹23,20,000, you can comfortably cover the required down payment of ₹16,00,000 for 80 Lakh worth a appartment, leaving an additional ₹7,20,000 for associated costs such as registration, stamp duty, and minor renovations.
Taking a Housing Loan:
To cover the remaining amount, take a housing loan of ₹60 lakh. Here’s the breakdown:
- Loan Amount: ₹60 lakh
- Tenure: 25 years
- Interest Rate: 8% per annum
The estimated monthly EMI for the loan will be ₹46,336. This scenario ensures that the couple can purchase their dream home in Sholinganallur while maintaining financial stability and meeting their other savings goals.
Conclusion
After purchasing the apartment, your monthly expenses will shift from paying house rent to servicing the new home loan EMI. With an increase in your monthly salary, you’ll have a substantial remaining balance each month. To manage this effectively, it’s crucial to allocate funds wisely. Prioritize building your emergency fund, maintaining savings for your future goals, and focusing on repaying the home loan.
To expedite loan repayment, consider using a significant portion of your extra savings to make annual lump sum payments towards the principal. This strategy will help reduce the loan tenure and the overall interest paid, allowing you to close the loan within 10 years. By following this plan, you’ll achieve financial stability and reduce debt more quickly, setting a strong foundation for your financial future.
