A Few years back, a retired Army officer whose story appeared in a news article in a leading daily, recalled an incident when he was just 24-years old. He served in 14 Rajput, one of the forward battalions in the India-Pakistan 1965 war.
He primed two hand grenades during an operation and kept them in the two pouches attached to his belt.
On the way, he met the Brigade commander in a jeep. Looking at Mathew’s outfit, he remarked, “Son, is it a bullet hole?” and then drove off. The enemy’s bullet had miraculously passed through the pouches and his uniform shirt without injuring him.
While he could easily pull out the grenade in the right pouch, the one in the left pouch was in a precarious state after being knocked off by the bullet. Had the bullet moved a millimetre differently, it could have released the safety pin and lever. Luckily, it didn’t go off.
Military v/s Financial Planning
Uncertainty in a combat environment is not unknown to Armymen and women. Yet, despite meticulous preparation, the outcome can go either way on a battlefield.
Thankfully, financial planning is not as uncertain for those in the armed forces.
An officer can expect to lead a decent lifestyle on retirement thanks to their inflation-indexed pensions. In addition, access to ECHS and military hospitals takes care of their health care needs.
If there is one primary goal that needs their attention, it is that of their child’s higher education. After all, one’s child may or may not follow in the parent’s footsteps. And yet, giving wings to their cherished dreams is imperative after thoughtful consideration.
Inflation – the ticking bomb
Inflation is the ticking bomb in the financial world. Inflation – the rate of increase in consumer price levels – has been averaging 7 per cent or more since the 1990s. Over the years, higher inflation has been eroding wealth, especially of conservative investors.
Moreover, education inflation is galloping in double-digits at a higher rate than income growth.
To illustrate, MBA fees in IIM (Ahmedabad) were about Rs 4 lakh in 2009, and it is now seven times that at Rs 28 lakh. It has increased by 18% each year!
While inflation is lower abroad, rupee depreciation (2-3% annually against the dollar) has made fees in foreign universities costlier.
Assuming 10% annual inflation, after 15 years, you would need Rs 42 lakh to sponsor private engineering courses for your child. In addition, you would need Rs 2.1 crore to fund medical fees in the same period. An MBA, in India, after 15 years, is quite likely to cost Rs 1.1 crore.
Fix the target
Supposing you plan for a Rs 1.5 cr education fund at the end of 15 years. How much do you need to save each year? Rs. 10 lakh? Thankfully, you need not save it all.
You might need to save only about 35-60% of your target corpus, depending on your asset allocation. The rest will happen thanks to the wonders of the power of compounding.
The monthly salary (without allowances) of a Major can be about Rs 1.1 lacs, while it can go up to Rs 1.8 lakh for a Lieutenant Colonel plus variable allowances. Over the years it will grow, as they get promoted and the Pay Commission revises salaries.
So, figure out how much you can save from your salaries. Supposing as a Lieutenant colonel, you can save Rs 30,000 specifically for education purposes every month. After 15 years, with a debt-based portfolio, it would grow only to Rs 92 lakh. Debt instruments provide safety of capital but also offer lower annual returns (6-7%).
Like in a battle, you might need to take some calculated risks to get a little further ahead.
Equity while volatile over the short also offers inflation-beating growth of between 11%-12% over the long term (7 years plus). You can reach a target corpus of Rs. 1.5 Cr in 15 years by investing Rs 25,000 each month.
All you would need to do is invest the Rs 25,000 in an equity fund via a systematic investment plan or SIP and increase the SIP by 5% annually. This aligns well with your DA increase each year.
Equity provides the best potential to beat inflation and create more wealth for investors. But, first, decide the optimal asset allocation mix you might need to reach your target.
Much uncertainty regarding sponsorship of your child’s higher education can be reduced through elaborate financial planning. First, fix the savings target and keep moving forward with regular investing. Defuse the inflation threat by investing in equity.