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38-year-old with 1.73 lac monthly salary and 57 lac loan – how to clear debt, save for retirement and child’s education?

Ramalingam

Ramalingam Kalirajan  |7101 Answers  |Ask -

Mutual Funds, Financial Planning Expert - Answered on Oct 15, 2024

Ramalingam Kalirajan has over 23 years of experience in mutual funds and financial planning.
He has an MBA in finance from the University of Madras and is a certified financial planner.
He is the director and chief financial planner at Holistic Investment, a Chennai-based firm that offers financial planning and wealth management advice.... more
Somiya Question by Somiya on Oct 15, 2024Hindi
Money

Sir, I have a net salary of 1.73 lac per month and my age is 38. My son is 2 years old & yet to start his education. My monthly EMI stands at 1.4 lac appx. My current savings stands at: PPF - 4 lacs, MF - 6 lacs, PF - 24 lacs, NPS - 8 lacs, and liability stands at: Personal Loan - 52 Lacs & Bike Loan - 5 lacs. I am targeting to close all loans by 2029 (5 years from now). I am investing 14k monthly in the following mutual fund: Mirae Assest ELSS - 2k, Kotak Emerging Equity - 2k, Axis Small Cap - 2K, Parag Parikh Flexi Cap - 2k, Axis Midcap - 2k, Canara Robeco Bluechip Equity - 2k, Quant ELSS - 2k. I have a health insurance of 1Cr & a Term Insurance of 1Cr. My main questions to you are how can I clear my debt as early as possible & also let me know how can increase savings for my retirement and my child's education & future?

Ans: You are managing a significant loan burden. Clearing this early will offer peace of mind. Your current EMI of Rs. 1.4 lakhs per month is a large portion of your income.

To clear your personal loan and bike loan faster, follow these steps:

Prioritise High-Interest Debt: Focus on your personal loan first. Personal loans often have high-interest rates. Divert any surplus funds to repay this loan.

EMI Boost Strategy: Whenever possible, make lump-sum payments. Even if you increase your EMI slightly, it will reduce the tenure.

Minimise New Loans: Avoid taking on any new loans until you clear the existing ones.

Balance Expenses: Since your EMI is quite high, it’s important to track and reduce any unnecessary expenses. Create a budget and stick to it.

Enhancing Savings for Retirement and Child's Education

It’s wise to think of both short-term debt and long-term goals, like your retirement and your son’s education. You already have a good base of savings in PF, NPS, and mutual funds.

Increase PF and NPS Contributions: Since PF and NPS are long-term and tax-efficient, aim to gradually increase your monthly contributions. This will boost your retirement corpus.

Focus on Child’s Education: Start investing separately for your son’s education. Choose a child-focused investment plan, either through mutual funds or PPF. Avoid mixing education and retirement goals.

Systematic Savings: Consider setting up a recurring deposit or another fixed saving plan to save for short-term needs, like your son’s school fees.

Review of Mutual Fund Portfolio

You are investing Rs. 14,000 monthly in mutual funds, which is a great habit. However, let’s refine your strategy for better results.

Diversify with Caution: You are invested in several funds. While diversification is good, over-diversification may dilute your returns. Consider reducing the number of funds to focus on the best-performing ones.

Actively Managed Funds: Actively managed funds tend to outperform passive index funds. The advantage lies in the fund manager’s ability to beat the market. This is especially important in the long run.

Taxation on Gains: When you sell equity mutual funds, be aware of capital gains taxes. LTCG (Long-Term Capital Gains) above Rs 1.25 lakh are taxed at 12.5%. STCG (Short-Term Capital Gains) is taxed at 20%. Ensure you plan your redemptions wisely to minimise tax liabilities.

Reassessing Debt-to-Investment Balance

Currently, your loan EMIs are significantly higher than your investments. It is crucial to realign this balance over the next five years. Here’s how you can gradually shift the focus from loan repayment to investment:

Debt-Free Timeline: You aim to be debt-free by 2029. It’s realistic, but you should consider accelerating this process. Once you clear your bike loan, redirect those funds toward the personal loan.

Increase SIPs Over Time: As you repay your loans, free up more funds for savings. Gradually increase your SIP amounts. Investing regularly will allow you to take advantage of market growth over time.

Build Emergency Fund: Since your EMIs are high, ensure you have at least 6 months of expenses saved in a liquid fund. This will protect you from unforeseen events.

Life and Health Insurance Adequacy

You have Rs 1 crore health and term insurance cover. That’s commendable for a 38-year-old with a young child.

Review Insurance Coverage: Ensure that your term plan covers your family’s living expenses, education costs, and liabilities. Ideally, your term insurance should be at least 10-15 times your annual income.

Health Insurance Adequacy: A Rs 1 crore health cover is good. Keep reviewing it periodically, as healthcare costs can rise.

Boosting Retirement Savings

Given your age of 38, you still have a good 20-25 years to build a robust retirement fund. Focus on these areas:

PPF Contributions: Your PPF balance stands at Rs 4 lakhs. Continue contributing to it, as it provides guaranteed, tax-free returns.

NPS Contributions: You have Rs 8 lakhs in NPS, which is a strong base for retirement. NPS provides tax benefits and is structured for retirement savings.

Mutual Fund Portfolio: As mentioned earlier, streamline your mutual funds. Continue increasing your SIP contributions. Equity funds will help you achieve long-term growth for retirement.

Final Insights

Your financial planning is on the right track. But there are opportunities to accelerate debt repayment, optimise savings, and fine-tune your investments. Focus on a balance between loan repayment and building a solid financial future for yourself and your family.

Here’s a summary of the steps ahead:

Prioritise high-interest loan repayments, especially the personal loan.

Continue investing in your PF, NPS, and PPF for long-term growth.

Increase your SIP contributions once your debt is under control.

Build a separate education fund for your son’s future needs.

By doing this, you can achieve your debt-free timeline, build savings for retirement, and secure your son’s education.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

www.holisticinvestment.in

https://www.youtube.com/@HolisticInvestment
DISCLAIMER: The content of this post by the expert is the personal view of the rediffGURU. Users are advised to pursue the information provided by the rediffGURU only as a source of information to be as a point of reference and to rely on their own judgement when making a decision.
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Hi sir, I'm 25y old. I have a salary of 55k per month I've started investing in May 2022 in mutual funds through SIP for long term 25-30years. Right now I've 60k of invested amount in MF Portfolio doing SIP of 7k per month. I've an emergency fund in FD of 60k and I've health and term insurance for me and family. I also have a personal loan of 6lakh which I took in December 2022. I'm paying 20k monthly for a loan. Still I need to pay 6.22 lakh in 3 years. I'm also thinking of starting investing 10k per month in chit funds for 2 years(trusted chit fund) assuming an annualized return of 15%. My monthly expenses excluding loan and SIP in MF is 23k. My MF Portfolio: Parag Parikh flexi cap - 2.5k Nippon small cap - 2k Axis bluechip - 2k Navi nifty50 index fund -500 Can you please review my MF Portfolio and guide me how I can clear my debt of 6.22 lakh as soon as possible.
Ans: It's fantastic to see your commitment to securing your financial future at such a young age! Your Mutual Fund portfolio shows a good mix, but let's fine-tune it a bit. Are you considering the risk factors of your current investments?

Now, about that loan. It's understandable to want to clear it as soon as possible. Have you thought about increasing your monthly payments towards it? It might ease the burden in the long run.

Regarding chit funds, while they offer potential returns, are you sure about their reliability and transparency? It's crucial to be cautious when exploring new investment avenues.

Remember, a Certified Financial Planner can offer personalized advice tailored to your goals and circumstances. With discipline and strategic planning, you'll be on track to financial freedom sooner than you think!

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Ramalingam

Ramalingam Kalirajan  |7101 Answers  |Ask -

Mutual Funds, Financial Planning Expert - Answered on Jul 02, 2024

Asked by Anonymous - Jul 02, 2024Hindi
Money
Hi. I am 32 years male earning 82000 monthly. I have 4 members to support at home. I have personal loans of 24 lakh which is need to pay at earliest and save for my child future studies. I currently save 5000 monthly in mutual fund and 50000 yearly in LIC also I have term plan of 2 cr. Please guide how to clear the debt and save for future.
Ans: You’re 32 and managing the financial responsibilities of a family of four while striving to clear a significant personal loan of Rs 24 lakhs. Balancing debt repayment with saving for your child's future and ensuring financial stability can be challenging but achievable. Let’s dive into a detailed plan tailored for you.

Commendable Efforts and Positive Steps
Steady Income: Earning Rs 82,000 monthly provides a solid foundation to work from.
Current Savings: Saving Rs 5,000 monthly in mutual funds is a great start towards long-term growth.
Term Insurance: Having a Rs 2 crore term plan shows a proactive approach to securing your family’s future.
LIC Policy: Contributing Rs 50,000 annually to an LIC policy reflects your commitment to saving.
Assessing Your Financial Situation
To chart a path forward, we need to understand your income, expenses, debt, and current savings in detail.

Income:

Monthly Salary: Rs 82,000.
Expenses:

Household Expenses: Monthly expenses for supporting a family of four.
Loan EMIs: Monthly payments towards the Rs 24 lakh personal loan.
Savings and Insurance: Rs 5,000 in mutual funds and Rs 50,000 annually in LIC.
Debt:

Personal Loan: Rs 24 lakhs which needs urgent attention to clear.
Savings and Investments:

Mutual Funds: Rs 5,000 monthly.
LIC Policy: Rs 50,000 annually.
Term Insurance: Rs 2 crore coverage.
Strategies for Clearing Debt
Eliminating your Rs 24 lakh personal loan quickly should be your top priority. Here’s a structured approach to tackle this debt effectively:

Prioritizing Debt Repayment
Clearing your personal loan should be prioritized to free up cash flow and reduce interest burden.

Steps:

Focus on High-Interest Debt: Personal loans often have high-interest rates. Prioritize this debt to save on interest costs.
Snowball Method: Pay off the smallest debts first to build momentum, then tackle larger ones. This psychological boost can help keep you motivated.
Avalanche Method: Alternatively, pay off the debt with the highest interest rate first to save the most on interest payments.
Budgeting and Expense Management
Creating a detailed budget is crucial to allocate funds effectively towards debt repayment.

Strategies:

Track Your Spending: Monitor all your expenses to understand where your money goes.
Cut Non-Essential Expenses: Identify areas where you can reduce or eliminate spending. Redirect these savings towards loan repayment.
Automate Savings and Payments: Set up automatic transfers for loan payments to ensure timely and consistent payments.
Exploring Additional Income Sources
Boosting your income can accelerate debt repayment and strengthen your financial position.

Ideas:

Part-Time Work: Consider freelance or part-time opportunities that align with your skills and interests.
Sell Unused Items: Declutter your home and sell items you no longer need. Use the proceeds to pay off debt.
Rental Income: If possible, explore renting out a portion of your home or other assets.
Refinancing and Debt Consolidation
Refinancing or consolidating your loans can simplify repayment and potentially lower your interest rate.

Options:

Refinance: Approach your bank to refinance your personal loan at a lower interest rate.
Debt Consolidation: Combine multiple loans into a single loan with a lower interest rate and one monthly payment.
Saving for Your Child’s Future
Simultaneously saving for your child’s education and future while paying off debt requires a balanced approach.

Setting Up an Education Fund
Creating a dedicated fund for your child’s education ensures you’re prepared for future expenses.

Steps:

Estimate Future Costs: Consider the cost of higher education and inflation when planning your savings goal.
Start Early: The earlier you start, the more time your money has to grow.
Regular Contributions: Make consistent contributions to this fund, even if the amount is small initially.
Leveraging Tax Benefits
Take advantage of tax-saving instruments to maximize your savings and reduce your tax liability.

Tax-Saving Strategies:

Section 80C: Utilize investments that offer tax deductions under Section 80C, like certain mutual funds, PPF, and EPF.
Children’s Education Allowance: Claim tax benefits on the education allowance you receive.
Investing in Growth-Oriented Assets
Investing in assets that offer higher returns can help your savings grow faster, though they come with higher risks.

Investment Options:

Equity Mutual Funds: Continue and possibly increase your investments in mutual funds for long-term growth.
Diversified Portfolio: Build a diversified portfolio that includes a mix of equities, bonds, and other asset classes.
Insurance and Risk Management
Ensuring adequate insurance coverage protects your savings and provides peace of mind.

Insurance Strategies:

Term Insurance: Your Rs 2 crore term plan is essential for securing your family’s future.
Health Insurance: Ensure you have comprehensive health insurance to cover medical expenses.
Review and Update Policies: Regularly review your insurance policies to ensure they meet your current needs.
Optimizing Your Financial Plan
A holistic financial plan integrates debt repayment, saving for future goals, and investing for growth.

Balancing Debt and Savings
Striking the right balance between paying off debt and saving for the future is key to financial stability.

Balanced Approach:

Allocate Funds Wisely: Divide your available funds between debt repayment and savings. Prioritize high-interest debt while maintaining savings for emergencies and future goals.
Increase Savings Gradually: As your debt reduces, increase your savings contributions proportionately.
Regular Financial Reviews
Regularly reviewing and adjusting your financial plan ensures it remains aligned with your goals.

Review Strategies:

Annual Reviews: Conduct an annual review of your financial situation to track progress and make necessary adjustments.
Life Changes: Adjust your plan for significant life events, such as changes in income, family needs, or expenses.
Market Conditions: Stay informed about market changes and adjust your investment strategy accordingly.
Seeking Professional Guidance
Engaging with a Certified Financial Planner can provide personalized advice and help you stay on track.

Professional Support:

Personalized Planning: A CFP can tailor a plan based on your specific needs, goals, and risk tolerance.
Regular Check-ins: Schedule regular check-ins with your CFP to review progress and adjust your strategy as needed.
Holistic Advice: Benefit from holistic financial advice covering debt management, investment planning, and risk management.
Final Insights
You are on a commendable journey towards financial stability and securing your family’s future. Clearing your personal loan and saving for your child's education simultaneously requires a balanced and strategic approach. Prioritize debt repayment, manage your expenses wisely, and continue investing in growth-oriented assets. With disciplined planning and regular reviews, you can achieve your financial goals and provide a secure future for your family.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

www.holisticinvestment.in

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DISCLAIMER: The content of this post by the expert is the personal view of the rediffGURU. Investment in securities market are subject to market risks. Read all the related document carefully before investing. The securities quoted are for illustration only and are not recommendatory. Users are advised to pursue the information provided by the rediffGURU only as a source of information and as a point of reference and to rely on their own judgement when making a decision. RediffGURUS is an intermediary as per India's Information Technology Act.

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