Spend, Save and Invest Smartly

How can one assess human life value?

First, the value of all yet-to-be fulfilled needs (in present Rupee terms) for Raj's family (Example 1) is over Rs 16 lakh (Rs 1.6 million). Though, it is significant to note that this number is really a moving target; as time progresses the needs could vary. The biggest impact however would be caused if the standard of living changed; even in the present example1 most of the HLV attributed to Raj is due to the income he will need to secure for his spouse in his absence (about 80%). Second, the other key components of the HLV are the monies that need to be set aside for education and other needs of Raj's child. Now, since the child is three years old and still has over 12 years to go to college we will need to estimate the amount of money Raj requires to provide today so that the future needs of his child are taken care of.

If Raj's child were to go to college today (let’s say Engineering, followed by an MBA) he will need to spend about Rs 20 lakh (Rs 2 million) over 5/6 years. Since this need is really 12 years out, Raj can invest money today in a manner that after accounting for inflation in education expenses, 12 years from now his child has sufficient funds at hand to fund education.

By our estimates (10% for inflation in expenses and a rate of return of 15% CAGR - Compounded Annual Growth Rate), Raj will need to set aside about Rs 10 lakh (Rs 1 million) today. A similar calculation needs to be done for the other needs. We have assumed the money to be set aside for other needs at Rs 750,000. The other components in terms of outstanding liabilities and loans are actual values as of today. While in present times 8% is a rational assumption (Fixed Deposits and some debt mutual funds (close-ended / capital protection) do offer returns much in excess of 8%, on a pre-tax basis; given the tax breaks that are available to Raj's spouse, the effective return would be about 8% pa), it is certain that going forward this rate is bound to change. And that brings us back to the point that the HLV is not a onetime calculation.

This is something you must revisit with your financial planner every year to ensure that your family is secured at all times. With respect to the concept of HLV, here are some key points :

  • HLV is a moving target and to make it meaningful, you must review it once a year. Rather than chasing the revised HLV year after year, the aim must be to get the broad trend right with the expectation that in the long-term, the actual and estimate will converge.
  • Do not get overawed by the HLV numbers thrown up. The 'number' is just a starting point and must be put into the context of your present ability to set aside money.
  • Remain disciplined in the sense that at any point in time you must have planned in such a manner that in your absence, your family will not need to compromise on their yet-to-be fulfilled needs.
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