Suresh (44) recently quit his job as vice president of marketing to start a travel agency that has been a long held dream. In case he doesn't succeed in the next five years, he would wind it up and take up a job again.
What he has:
- Assets: Rs 50 lakh in bank and Provident Fund; Rs 25 lakh in FDs; Own house
- Monthly Expenses: Rs 50,000
What he wants:
- Start-up funding (approximately Rs 40 lakh)
- Living expenses for the next five years
- Set aside some money for retirement, if possible
What They Should Do:
- Emergency Fund: Maintain sufficient money in highly liquid form to meet at least 6 months monthly expenses. For this, he should have Rs 3 lakh in a savings account with sweep in facility.
- Health Insurance: Suresh has been healthy so far, however, a sudden medical expense cannot be ruled out. He should get health insurance of around Rs 5 lakh which should cost him an annual premium of around Rs 8,000. Read more in our article How to buy health insurance.
- Life Insurance: Since Suresh is single and has no financial dependents, he doesn't need any life cover.
- Investment Portfolio: Suresh has a total of Rs 75 lakh, including his provident fund money which he should withdraw. He can do so two months after quitting his job. After setting aside money for his start-up and emergency fund, he would have Rs 32 lakh left with him. Of this, he should invest Rs 28.5 lakh in a couple of debt short-term funds, aiming to achieve a post-tax yield of 8% per annum, and create monthly systematic withdrawal plan to meet his living expenses. By doing this, he will be able to provide for his expenses for the next five years, after factoring in an inflation rate of 6%. The balance Rs 3.5 lakh should be invested in a couple of multi-cap equity funds through SIPs and left to grow over the long-term. By the time he turns 60, this money can grow to over Rs 21 lakh assuming a return of 12% per annum. While certainly not enough to cover for retirement, at least he would be able to build some long-term capital while he invests most of his current accumulations in his dream project.
That said, he should seriously consider trimming his monthly expenses to Rs 40,000. If he manages to do that, he'll need to invest Rs 25.5 lakh in short term debt funds for his living expenses, leaving Rs 6.5 lakh to grow in equity funds. This can grow to Rs 40 lakh by the time he is 60.
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