May 24, 2000
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Saving for a home
Earlier: Getting ready for retirement
Previously, Rohit Sarin analysed how an individual at three different stages of his life can plan for his retirement. This time around, he tackles another financial goal which virtually everyone faces: house purchase. We will restrict this analysis within the following parameters:
- House purchase at the age of 40
- Balanced risk appetite
- Estimated current value of the property stands at Rs 2.5 million
CASE IAssumptions in the case of the 25 year-old....................
- Existing savings for house purchase: Nil
- Percentage of loan to part-finance house purchase: 25%
- Annual return on debt funds: 12 per cent
- Annual return on equity funds: 20 per cent
- Annual rate of inflation: 8 per cent
Which lead to....................................
- A recommended debt to equity ratio of 40:60. For this, a mix of debt and equity based funds should be selected.
- Estimated current value of the desired property of Rs 2.5 million would inflate to a little more than Rs 7.9 million after 15 years.
- This would be part financed by a loan to the extent of 25 per cent which is Rs 1,980,000.
- Therefore, the balance amount of Rs 5,950,423 would need to be saved over a period of 15 years.
- With a debt to equity mix of 40:60, the person needs to begin with a total monthly investment of Rs 5,954. This monthly saving/contribution would keep on increasing every year.
In figures, the complete 15-year plan translates to..............
FINANCIAL PLANNING
Year |
Year |
Equity
Fund |
Debt
Fund |
Total |
Yearly |
Income |
Cumm.
Balance** |
2000 |
1 |
3,572 |
2,382 |
5,954 |
71,447 |
5,547 |
76,994 |
2001 |
2 |
3,930 |
2,620 |
6,549 |
78,591 |
17,374 |
172,959 |
2002 |
3 |
4,323 |
2,882 |
7,204 |
86,450 |
32,034 |
291,444 |
2003 |
4 |
4,755 |
3,170 |
7,925 |
95,095 |
50,051 |
436,590 |
2004 |
5 |
5,230 |
3,487 |
8,717 |
104,605 |
72,039 |
613,234 |
2005 |
6 |
5,753 |
3,836 |
9,589 |
115,065 |
98,712 |
827,011 |
2006 |
7 |
6,329 |
4,219 |
10,548 |
126,572 |
130,902 |
1,084,485 |
2007 |
8 |
6,961 |
4,641 |
11,602 |
139,224 |
169,579 |
1,393,288 |
2008 |
9 |
7,658 |
5,105 |
12,763 |
153,156 |
215,869 |
1,762,313 |
2009 |
10 |
8,423 |
5,616 |
14,039 |
168,468 |
271,083 |
2,201,864 |
2010 |
11 |
9,266 |
6,177 |
15,443 |
185,316 |
336,742 |
2,723,922 |
2011 |
12 |
10,192 |
6,795 |
16,987 |
203,844 |
414,610 |
3,342,376 |
2012 |
13 |
11,212 |
7,474 |
18,686 |
224,232 |
506,734 |
4,073,342 |
2013 |
14 |
12,332 |
8,222 |
20,554 |
246,648 |
615,488 |
4,935,478 |
2014 |
15 |
13,566 |
9,044 |
22,610 |
271,320 |
743,621 |
5,950,419 |
CASE IIAssumptions in the case of the 30 year-old....................
- Current existing savings towards purchase of home: Rs 100, 000
- Approximate post-tax annual return on existing savings: 15 per cent
- Percentage of loan to part-finance house purchase: 25 per cent of the net gap
Which lead to....................................
- Recommended debt to equity ratio of 50:50. For this, a mix of debt and equity based funds should be selected.
- Estimated current value of the property of Rs 2.5 million would inflate to Rs 53,97,312 after 10 years.
- The value of the current investment would grow to Rs 404,556.
- Therefore, the target amount to mobilise after 10 years would be Rs 49,92,757.
- This would be part financed by a loan to the extent of 25 per cent which is Rs 12,50,000.
- Therefore, the net amount to save in next 10 years would be Rs 37,42,757.
- With a debt to equity mix of 50:50, the person needs to begin with a total monthly investment of Rs 10,429. This monthly saving/contribution would keep on increasing every year.
In figures, the complete 10-year plan translates to............
Year |
Year |
Equity
Fund |
Debt
Fund |
Total |
Yearly |
Income |
Cumm.
Balance** |
2000 |
1 |
5,215 |
5,215 |
10,429 |
125,152 |
9,301 |
134,453 |
2001 |
2 |
5,736 |
5,736 |
11,472 |
137,667 |
29,054 |
301,174 |
2002 |
3 |
6,310 |
6,310 |
12,619 |
151,434 |
53,418 |
506,026 |
2003 |
4 |
6,941 |
6,941 |
13,881 |
166,577 |
83,223 |
755,827 |
2004 |
5 |
7,635 |
7,635 |
15,270 |
183,235 |
119,433 |
1,058,494 |
2005 |
6 |
8,398 |
8,398 |
16,797 |
201,558 |
163,168 |
1,423,221 |
2006 |
7 |
9,238 |
9,238 |
18,476 |
221,714 |
215,728 |
1,860,663 |
2007 |
8 |
10,162 |
10,162 |
20,324 |
243,888 |
278,618 |
2,383,169 |
2008 |
9 |
11,178 |
11,178 |
22,356 |
268,272 |
353,580 |
3,005,021 |
2009 |
10 |
12,296 |
12,296 |
24,592 |
295,104 |
442,634 |
3,742,759 |
CASE III
Assumptions in the case of the 35 year-old....................
- Existing savings for house purchase: Rs 200,000
- Approximate post-tax annual return on existing savings: 15 per cent
- Percentage of loan to part-finance the house purchase: 25 per cent of the net gap
Which lead to....................................
- Recommended debt to equity ratio of 50:50. For this, a mix of debt and equity based funds should be selected.
- Estimated current value of the property of Rs 2.5 million would inflate to Rs 36,73,320 after 5 years.
- The value of current investment would grow to Rs 4,02,271.
- Therefore, the target to mobilise after 5 years would be Rs 32,71,049.
- This would be part financed by a loan to the extent of 25 per cent which is Rs 8,20,000.
- Therefore, the net amount to save in next 5 years would be Rs 25,51,049.
- With a debt to equity mix of 50:50 the person needs to begin with a total monthly investment of Rs 24,150. This monthly saving/contribution would keep on increasing every year.
In figures, the complete 5-year plan translates to..............
Year |
Year |
Equity
Fund |
Debt
Fund |
Total |
Yearly |
Income |
Cumm.
Balance** |
2000 |
1 |
12,075 |
12,075 |
24,150 |
289,802 |
21,537 |
311,339 |
2001 |
2 |
13,283 |
13,283 |
26,565 |
318,782 |
67,278 |
697,398 |
2002 |
3 |
14,611 |
14,611 |
29,222 |
350,660 |
123,695 |
1,171,754 |
2003 |
4 |
16,072 |
16,072 |
32,144 |
385,726 |
192,711 |
1,750,191 |
2004 |
5 |
17,679 |
17,679 |
35,358 |
424,299 |
276,559 |
2,451,049 |
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