Sunday, July 22, 2007

My Life Plans and Their Financial Implications

I have come to realise that it is not humanly possible to do everything you want within one lifetime. And according to the hindu philosophy of rebirth, your incarnation in the present human form is a result of crores of births and even more good actions. So it becomes essential that you if you want to enjoy your time on this earth, you plan accordingly. Obviously there are those that would say that you don't know what would happen to you the next moment. But my point is - what if you were to survive the next moment? Would it be not better lived if you had planned on how to spend it and accordingly enjoy it. And as everybody knows, one joy leads to others, and the big cascading effect.

Leaving aside the spiritual, I am planning for the materialistic joys that I may be able to enjoy in the future. And for every materialistic joy in this world I would need money, the medium to buy everything possible on this earth and hopefully a medium which will not change in my lifetime. So in all my calculations below I will assume that the rate of inflation remains at 6%, which for the long term is a good enough assumption. I would also like to assume a min 6% increase in my income on a yearly basis, such that it keeps pace with inflation at the minimum

First the very distant future

I would like to move away from the active corporate life in the early 40's and shift into an academic pursuit of knowledge and sharing of the same. Making it more definite, at the maximum age of 45 I should be in a university and pursuing my degree in philosophy, economics or english literature. Hopefully at that age I would be happily married and have a child. So I would need to provide for them and also have enough money to be able to give up the high earning corporate life and make the transition to the life of an academic.

So going by the current market scenario, I will take a leap of faith and assume that Rs. 30,000 a month will cover all inflationary expenses for an average Indian family and allow them to live in comfort (and not luxury!). Compound it at 6% for 20 years and this becomes Rs. 96,000 per month. Round it off to Rs. 1,00,000 monthly or Rs. 12,00,000 annually. Now considering all the current monthly income schemes, it is safe to assume that a 8% p.a. income can be generated without much sweat from a decent fund. So I would need a corpus of 1.5 crore rupees to generate the desired income. Now, another another assumption is that of what would be the rate of return on my investments over the next 20 years. It has been seen that a 12% rate of return is an achievable target, even if you are a passive investor. So putting these numbers into a calculator, the magic figure that comes up is an investment of Rs. 20,000 per month in an instrument which would give me a post-tax return of 12%, which is a very achieveable figure.

In my above calcuations I have assumed only inflationary expenses, i.e. things like food, petrol, clothes, some budget for fees, medical expenses, etc. I have excluded all such items such as EMI's for car, house, and any other such things which I would hopefully procure from the extra income that I would get annually. Also I have not taken into consideration that even when teaching I would have at the least a very nominal income.

Now for some magic play with the figures above.

You can find such financial calculators all over the internet. The one from moneycontrol can be found here.

So what do I do with 6% increase in my income that I would hopefully incur. Well that goes into buying that house, the car and obviously the Harley Davidson. Again there is continued inflation even during the post corporate life. Again hopefully the income from academic activities such as teaching would augment the income to beat inflation.
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