Many people with reasonably well off parents and double incomes (however shaky one’s job is) think of themselves as rich. Well if not rich, upper middle class, but make rich choices. At times this can be funny, if it were not so serious. This actually comes from not understanding future uncertainties, return on investments, inflation, etc. – can we fix it?

Well here is an attempt.

Financial Planners use a word ‘net worth’ – this is the term that is used to express the gap between our Assets and Liabilities. It is always assumed that your net worth will be positive. If it is negative, of course it means you are bankrupt. Let us put a twist to this.

Let us look at the Balance sheet of a 35 year old man, earning Rs. 25 L a year and married to a woman aged 30 years, and earning 15 L a year. Both are well qualified and staying in a house for which they are paying an EMI. They have 2 children – one is a 7 month old toddler and the elder child is 4 years of age and about to join an International school. Their take home salary is Rs. 1.2L for Rahul and Rs. 85,000 for Aarti. Their EMI is Rs. 55,000 and takes away a chunk of their salary!

Now is the schooling / education dilemma. Rahul feels that the children should go to an International school near their house and this is likely to cost  “only” Rs 1.25L per annum. Aarti feels that Rs. 30,000 per month (eventually when the second child also goes to school) is not an affordable expense, but Rahul who just bought a second hand (6 month old) Audi A3, the school was a non negotiable.

When Aarti met me she felt that they were living beyond their means and it was not necessary. She gently reminded Rahul that the house was partly funded by his parents (or the EMI would have been higher!!). They do not pay any child care expenses because both the grandparents stay nearby and share the ‘looking after’ responsibility.

I suggested something dramatic. I said create a balance sheet. Create a Goal Sheet. Once you arrive at the Goals, put all that in the balance sheet as liabilities to be provided over the working life.

I said Mortgage is something that you owe Hdfc Ltd., Life insurance premium is something that you owe to your dependents. Goals (if you are serious about the goals and the direction of the goals) you need to treat it like a serious liability. To pretend that your current cash flows are good and using excel to extrapolate numbers is tempting and stupid. What if you are unemployed for say 5 months? What if your parent who is now not financially dependent becomes financially dependent on you after 10 years?

She was herself stunned when she saw the figures. Her Retirement fund required came to Rs. 26 crores. Her children’s education requirement came to Rs. 9 crores! He also needed to fund their vacations, cars, lifestyle etc. Aarti put all those requirements at a Rs. 10 crores.

I had to butt in and say ‘tjese are all the known things we still do not know about unknown things like parent’s illness’.

I asked Aarti to include children’s marriage, buying a second house, etc. I can assure you that I am not the most popular guy in the Rahul household!! However Rahul being a CA had very little mathematical argument against this approach.

Now the balance sheet looked like this

Liabilities: Goals Rs. 45 crores, Home Loan Rs. 40L , Car loan Rs. 13L. Assets side was just one house worth about Rs. 1.3 crores, and some ELSS worth about Rs. 5Lakhs.

I then worked out the EMI (if goals are liabilities, SIP is EMI, right?).

Now go to free fin cal and do your OWN exercise. Enough of Voyeurism. In your life it does not matter what Rahul and Aarti do.

What matters is what are your goals, and if you convert those goals to liabilities, are you solvent?

Do you have it in you to spend money on that extra car, extra vacation, etc.

THINK BEFORE YOU ACT.

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  1. As usual, excellent article Subra Sir. Nice way of looking goals as liabilities, SIP as EMI a new perspective

  2. “She was herself stunned when she saw the figures. Her Retirement fund required came to Rs. 26 crores. Her children’s education requirement came to Rs. 9 crores! He also needed to fund their vacations, cars, lifestyle etc. Aarti put all those requirements at a Rs. 10 crores”

    …… 😀
    Is this achievable?
    What kind of CAGR is assumed?

  3. @Ritesh
    Best to play around with the calculators in Freefincal.
    You can see impact of returns/inflation you assume on the corpus for multiple goals. Vary the assumptions to understand how your reality stacks up with your dreams (goals). You will then answer your own questions on which goal is achievable and which is not.

    Cheers

  4. lakshminarasimman

    sir basically it is needs versus wants
    we have to be clear what are those and address needs first
    wants we can use concept of delayed gratification

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