Don’t wait for your liabilities to increase, start financial planning early in life.

Don't wait for your liabilities to increase, start financial planning early in life. Lisa Mary Thomson
helps you calculate your Human Life Value for taking investment decisions

    THERE are always some people who live for the day's pleasures. Amit Gujral, a senior MNC executive, too belonged to this group. No doubt, the 30-year old made investments but more often than not, he spent his generous salary and perks on doing just what he and his family always dreamed of — the honeymoon to Hawaii, a summer holiday in a villa in Tuscany, an antique crib for his firstborn…the list was endless. Up until the day when Gujral went for his health check-up, only to be told that there was a large growth in his kidney. Further tests revealed that the growth was malignant. Sleepless nights followed, not because Gujral was afraid of death, but more so because he hadn't made any provisions for his family.
    If you're a young person and think that financial planning must be undertaken only when you are older, with a family and have greater liabilities in life, you're sadly mistaken. On the contrary, the earlier you start planning, the better. While it may be great to have a financial planner to help you out, there is no stopping you from trying to do this yourself. To help you become your own financial planner, SundayET begins with the basic premise of how to calculate your Human Life Value (HLV), based on which you can plan your further investments.
THE DEFINING NUMBER
According to Kunj Bansal, senior vice-president (portfolio management services) at Kotak Securities, "Human Life Value (HLV) is nothing but the money that you are going to make over the rest of your life. It is the present value of all that you are likely to earn in the future." Over a period of time, however, the process of calculating this has been modified to include the element of expenditure. So, in addition to your salary, it also takes into account the amount you are likely to spend in the remaining years of your life. Further elements have also been factored in such as already existing savings and bank deposits while other aspects like the house you are living in and the gold that you possess will be discounted.
FINDING YOUR HLV
Arriving at this figure can be as complicated or simple as you would like it to be, depending on all the elements that you include in the process of drawing your conclusions. However, for practical purposes, here's a very simple way of arriving at this figure.
KEEP ADDING
Start off with a basic figure such as your annual income. Use this to calculate your remaining earning capacity. For instance if you are 30 and are most likely to work till the age of 60, then you would need to work out how much you are likely to earn over the next 30 years of your life. Add your current savings to this. Savings in this case, would mean what is available to you in the form of liquid cash and fixed-deposits. "Once you have done this, formulate the present value of all the future earnings and you will then arrive at what is called the Gross HLV," says Mohit Thadani, head advisory, wealth management, Motilal Oswal Financial Services.
BEGIN SUBTRACTING
From the gross HLV, you need to deduct the expenses that you are likely to face on a daily basis such as those required to meet household expenses. You also need to factor in the taxes you are meant to pay if you haven't already deducted it while calculating your income. Also deduct current financial assets from the gross figure.
    Keep a calculator near you because more subtraction follows. "Next, you will need to deduct all the one-time planned expenditures that you are likely to come across in your lifetime," explains Bansal. For this, you will need to know the approximate amount that you are likely to spend on buying your dream house. If you have kids, you should have an idea of whether you want to set your kid to study abroad or within the country and determine the kinds of costs that will be involved. And then comes the large, but often, unavoidable expenditure that is involved in your child's marriage. And then, the expenses that could suddenly arise in the case of an emergency.
NET HLV
After all these deductions, the figure that you finally arrive at will be your net HLV or your expected HLV. Based on this figure, you need to plan your investment pattern. According to Thadani " It is imperative for an individual to work out his/her own economic value, so as to create replacement for his/her earnings in case of his/her demise – either through insurance coverage or through utilising his/her current wealth or combination of both." While things may vary according to your risk appetite, the key remains in investing in instruments- be it debt, equity, gold or real estate- which match the time frame that you have in mind and provide you with the adequate returns.
OTHER ADJUSTMENTS
While the method mentioned above is the most basic, there are a few more points that could come in handy. You would need to make adjustments to the basic calculations to include the possibility of salary rises or even job cuts in the present situation. Some people also include the life expectancy of the spouse while arriving at HLV. Bansal adds " Individuals also need to prepare themselves for a low-interest regime. As the economy develops, individuals should not expect the high rates of interest that they were used to getting in the past."
    lisa.thomson@timesgroup.com