Financial Planning

I am 50 years old and run a business from a small town. My wife, 46, is a homemaker. My son is studying in class 10. Although we have a good customer base, due to the demographic profile of my town, I am unable to expand my business much. My monthly surpluses are ploughed backed into the business.

I am eligible for one-third share of our ancestral property. Due to some family problems, we are not in a position to sell or raise loan against the said property.

How do I increase my surplus and save for my future goals?

- Sundar

It is prudent to meet financial goals (other than business expansion) by investing in different asset classes based on the timeframe and your risk profile. So, do not redeploy your monthly surplus in your business, but use it to save for other goals.

Although you have been running this business for more than two decades now, your financial assets are still not substantial.

Life insurance is meant to be a risk cover. Do not save through expensive endowment policies alone.

Education

Since your son’s higher education will begin in less than two years time, save through debt investments or earmark deposits for this purpose.

Business Fund

You have stated that your business has a good customer base. Going through your business financials, it appears that your return on capital is about 20 per cent.

If you keep raising loans for business expansion, your margins too will be hit. The plot that you own is in the outskirts of Coimbatore and you live far away from this plot, its make sense to sell the parcel of land and invest the proceeds in your business.

Even if the property were to grow at 20 per cent, you will have nothing to lose.

For the second level expansion you can consider raising a loan against your insurance policies. The interest cost is likely to be around 9-10 per cent.

Retirement

Since you have not stated any succession plan after you retire, we presume you will be selling the business post-retirement.

Your current annual living expenses of Rs 1.8 lakh will be Rs 4.96 lakh after 15 years, if the inflation rate is 7 per cent.

If you live till 80, at retirement you should have a corpus of Rs 75 lakh and it should earn returns in line with inflation.

To reach a target of Rs 75 lakh, you ought to save a sum of Rs 19,700 every month for next 15 years and it should earn post tax return of nine per cent. If you decide to sell the business after retirement, you will be able to generate a handsome corpus that you can leave behind as your estate.

However, if you plan to lease the business, you will have steady monthly inflows that will take care of any improvement in your standard of living.

Insurance

Buy an online term plan for Rs 25 lakh. Your health cover is very low. Buy a health insurance policy for Rs 5 lakh each for your spouse and yourself. Opt for hospitalisation cash facility to cover some loss of business due to non-working days.

(The author is CEO, myassetsconsolidation.com )

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