Switching financial plans mid-stream

KARACHI: Today’s column is about a mid-career professional who thinks it is too late for him to start planning his finances.

Any mid-career professional reading texts on personal finances can find them very discouraging. Most are written from the perspective of people who are just starting out their careers and have their whole working lives ahead of them. “How can I possibly catch up?,” thinks the average 40-something who reads about the benefits of having a clear financial plan.

There is no way to sugar-coat it: people who start out early in their financial planning have a clear advantage over those who catch on to the idea relatively later in their careers. But that does not mean that anybody who did not start investing from the day he or she graduated from college is doomed. If anything, that person should be even more diligent about managing their money, since they have less room for error.

Take the example of Mr S. He is a 42-year old marketing executive based out of Karachi. He makes around Rs300,000 per month, has two children and lives in house that he bought with a mortgage in a middle class neighbourhood. He has two children, aged 8 and 11, whom he wants to send abroad to study. While he has substantial savings, most of them are already ear-marked for expenses that he already has.

So how would Mr S start saving? The first thing that I would advise Mr S to do is to lay out his major expenses. His mortgage comes comfortably out of his salary and although it takes away a sizable chunk of his income, will leave him with a house that he will own within the next ten years.

The other major expenses he is left with are his children’s college education and his own retirement. He vaguely suggests something about his daughter’s wedding expenses but that, of course, is absurd. Everyone knows that spending large amounts of money on weddings is ridiculous.

If Mr S saves about 20% of his salary, which he can, he should arrive at a monthly savings of about Rs60,000. Over a year, this comes to a hefty sum of about Rs720,000. Mr. S describes himself as a person who has a moderate appetite for risk so I suggest investing in a balanced mutual fund, which invests in both stocks and bonds.

Mr S is likely to earn an average of about 15% per annum (based on the blended average of the 10-year average returns of government bonds and the KSE 100 Index). Assuming he plans on retiring in 20 years, he will save approximately Rs14.4 million. His investments, however, will likely have yielded Rs79.6 million. Even if he is very conservative, investing only in government bonds, his retirement account is likely to reach Rs43.4 million in value.

As for his children’s education, it seems difficult that he will be able to afford educating them in the United States, or even Britain for that matter, barring any scholarships or other financial aid. Canada, however, seems like a viable option. If he saves another 20% of his income exclusively for their education, which would strain his household budget, he would be able to save close to US$100,000 over the next eight years, which should be just in time for his son to go off to college. That amount would be able to cover almost 4 years of education at a Canadian college (rupee depreciation expected to result in an exchange rate of Rs95 to the US dollar).

Paying for his daughter’s education would then become difficult, however. He would only be able to save up for one year of an education abroad for her by the time she got to a college going age. For that, I will admit, I do not have space to give a detailed plan.

Next week, I will be happy to help another reader.

Note

This column will now begin giving out advice to readers who ask for it. Beginning this week, I shall be profiling individuals based on real life examples and creating summarised financial plans. Readers are welcome to write in to me and seek financial advice. I shall be happy to respond to as many as I can through these pages. Your anonymity is guaranteed.

Published in the Express Tribune, May 31^st, 2010.