I met a college friend after a long time. After reminiscing about canteen, professors and the college beauty queen, I started complaining about my crappy job and how I would love to retire in ten years.

Yeah, said Aditya. That’s the trend these days. FIRE: Financial Independence, Retire Early.

Makes sense, I said. If I could do that. Then I could pursue my farming hobby full time. Everyone wants to retire early, but am I ready? Am I rich enough?

Learn this financial planning tool to know for sure. First of all, let’s ask ourselves how much money is enough? How much do I need to have to call myself rich?

Practically speaking, being very rich actually means that the amount of savings you have is more than sufficient to ensure that your lifestyle of choice is assured and there is little risk to that. Please note, the phrase is ‘lifestyle of choice’ and not ‘extravagant lifestyle’.

Assuming your annual expenses equal 10 lakh. The amount of savings required is directly linked to your yearly expenditure. One needs a minimum of 25 times your annual expenses (2.5 cr) to lead a comfortable retirement.

It is very important to note that when we say savings we are talking about liquid financial assets. Not illiquid business assets, gold or real estate which may or may not yield fruits. To be more specific, assets which beat inflation because your expenses will double every 12 years.

Calculate for yourself. Where you are currently on the Richie Rich Scale?

I was looking for Mother’s day gift options online and Google was giving ideas like flowers, jewellery, coffee mugs and cushions that read World’s Best Mother or Love you Mom and many others.

My friend suggested: how about a sumptuous lunch at a restaurant? Or better, you cook a meal for her and later you can take her to a spa. But we do this year after year. How about something different:

1.Gifting a health cover to your mother assures her of the best medical care when needed without any strain on her finances.

1. Starting a fund to realize her dream: Has your mother cherished a secret desire to travel to Switzerland, on an international cruise ship, any other such dream. Help her achieve her dream.
2. Most likely, her savings are “invested” in fixed deposits or post office schemes. Given the plunging rates of small saving schemes and their tax inefficiency, help her open a mutual fund account and invest in hybrid funds which will be a mix of debt and equity. Debt will lend stability and equity will offer good returns.
3. Women are fond of having gold jewellery and gold accessories. However, gold does not provide recurring returns or interest income. Better options are Sovereign Gold Bonds, Gold ETFs and E-gold as they can provide regular interest income, safety and have no making charges.

This year, let’s give Mom something of Lasting Value, just like her love for us.

Ranveer, Deepika and their two kids are living a comfortable life. Deepika has taken a break in her career to take care of the kids and Ranveer is working in a multinational company. A typical Indian family with a home and a car loan.

Ranveer is doing very well in his career, however he has a niggling fear – if something were to happen to him, what will happen to his family, how will they pay off the loan? So he is thinking of buying insurance.

His advisor suggested that he buys a term insurance of 2 crore which will cost only 14k every year and will cover him till the age of 65. Unfortunately or fortunately if Ranveer lives beyond 65 then he will not get anything from the policy.

Ranveer – I’m paying premium for 35 years and will not get anything in return if I’m alive. I’ll be happy that I’m alive but is there any option where I’ll get some money if I survive?

Advisor – Yes there is an option – Return of Premium (RoP), where you will get the entire premium back if you survive. However a cover of 2 crore will cost you Rs. 40k.

Ranveer – Well that sounds like a better option, at least I’ll get back the premium paid for 35 years.

A term plan, which pays in case of death of the insured but returns the full premium if the policyholder survives the policy term. Sounds like free insurance, right?

Truth be told: If it seems too good to be true, it probably is.

Return of Premium option – Premium paid will be 14 lakh (Yearly premium – 40k for 35 years), you will get back 14 lakh minus GST.

Plain Vanilla Term Insurance – Premium paid will be 5 lakh and Ranveer can invest the remaining 26k. Even a modest return of 8% will give him 48 lakh Vs 14 lakh in the return of premium option.

Return of Premium – A trap for those who always thought paying premium for a Term Policy was a waste.

Last time we discussed how Ajay and Neha had taken a home loan of 50 lakh and paid EMI of 45k monthly for 20 years. They also started an SIP of 5k for the same tenure.

After 20 years they had paid off the principal amount of 50 lakh, plus interest of 58 lakh, a total of 1.08 crore. The SIP of 5k gave them close to 58 lakh in 20 years, equal to the amount they had paid as interest over the years on their home loan.

Now some of you have asked – What if they would have paid that surplus of 5k towards their home loan instead of starting an SIP?

Well, in this case, they would have paid off the home loan in 15.5 years. After the loan had been paid off, they started to invest 45k plus 5k for the remaining 4.5 years which gives an amount of close to 37 lakh (assuming 13% CAGR).

Since the home loan was paid off in 15.5 years, they will not get the tax benefit under Sec 24 on the interest component for the remaining 4.5 years which comes to 87k (20% tax bracket) and 1.31 lakh (30% tax bracket).

So the net benefit would be close to 36 lakh (37 lakh – 87k) against 58 lakh.

Counter argument – some people may not be comfortable with a large housing loan and to reduce their stress, they may want to get rid of the loan burden at the earliest. In that case paying off the home loan would be the best option.

From the personal finance point of view, One should only consider prepaying their home loan if current investments or opportunity cost fetches a lower return than the actual (after tax effect) interest burden.