Posted by: Uma Shashikant on Jul 02, 2018, 03.47 PM IST
By Uma Shashikant
This week’s story is about a 35-year old friend, who wants to be in charge of his money, but is not sure how to go about it. That middle stage after working for about 10 years is a challenging one for many. When the elderly speak of “settling down”, the young shrug it off. There is no stereotyping one’s money journey. At 35, some may have risen to be CEOs; some would have founded a potentially big business; some chosen a second profession and made progress; but this story is about the others, who have to make do with what they have, and still feel good about it.
Not all of us find our calling; or end up with jobs we love doing. Our friend is an engineer, who found work at a large firm. He then worked hard to keep his job and earn a good performance rating. In the large group of thousands of engineers, he did not know what his career path would be. He was not a slacker, but quite content with a stable job. Many of us don’t question things that happen to us—if there is nothing wrong with the job, it is fine is the attitude. Then we get used to the monthly pay cheque and taking risks with it is not seen as desirable. To have achieved a stable and steady income is a good milestone for the mid-thirties.
Our friend did not quit his job to pursue a postgraduate degree. The idea of studying for two years without knowing if there would be a better job at the end of it was difficult. It seemed too tough to get into prestigious universities or shoot for a high GRE/GMAT score while working. Without the comfort of a good school’s placement assurance, quitting a job was tough. There are many who take up jobs they know is a compromise even after a postgrad degree. They spend the initial years trying to change, move and seek what they think would be better. By the mid-thirties, making peace with the chosen profession is the path a majority take.
My friend’s first problem was the credit card. Earning money and being independent meant that there was freedom to spend. He was happy to spend on what mattered most to him —his gadgets, gym memberships, eating out, travel and friends. Then he got married and the demands on his income grew to accommodate gifts, relatives, ceremonies and rituals. Soon our friend was routinely borrowing on his card. He knew it was expensive, but it was also convenient and discreet. Making choices with money, and being able to prioritise is a skill learned the hard way. By the mid-thirties, one should have mastered the spending process —learn to say no or find smart ways to sidestep expenses one would later regret
The second problem was the EMI. There were EMIs for the house and the car, and they now wanted a second car. A loan restricts the amount of disposable cash and makes discretionary expenses difficult. It makes little sense to spend most of the salary on EMIs and manage household expenses on the credit card. Lenders may be willing to fund you based on your income, but only you know your expenses. After taking care of mandatory expenses to run the house, not over 50% of whatever income remains should go towards EMIs. By the mid-thirties, a regular saving habit should have formed, with at least 20% of the income going towards saving. No, EMI for the house cannot be counted as saving.
The third problem that our friend had was running out of cash from time to time. Even with two incomes and a comfortable lifestyle, there were times when they returned after a holiday and found there wasn’t enough money after such a large ticket expense. An unexpected expense for a wedding in the family, or illness of near and dear ones, or a requirement for funds from parents, put the young family out of cash. The feeling of being on the edge was stressful. This is the direct result of the wonky asset allocation of our friend. His biggest asset was the house, and they lived in it. It took a huge chunk as EMI and earned no income. Do not overdo the first house. You will move up in income and buy yourself another, anyway. Let the first house be a basic one, in the suburbs, and just be the emotional anchor you need. The lower EMI will leave space for other assets. Assets such as bank deposits, mutual funds, bonds and shares will provide the buffer.
To have liquid assets enables you to borrow against them at lower rates; liquidate them when needed; add to or take from them as you have surplus or need funds; and stabilises your personal finances. Saving early, even if it is a small sum, is a great habit. A Rs 1,000 SIP may seem small, but after a 10-year period, it would represent a tidy sum available as back up, and the SIP amount could be stepped up as incomes and savings grow. By the mid-thirties, your house should not be over 60% of your assets. You want to get that proportion to 30% or lower by the time you retire in the next 30 years. Greater the amount in assets that can be easily sold, accumulated and managed, better your financial lives.
Our friend worries a lot about financial goals. He hears about them too often. He is nervous about whether he has enough for his child. He thinks about retirement and wonders if it is too late to begin accumulating a corpus. He is not sure if he has enough insurance. A simpler way to look at it is to focus on building assets – assets that can be drawn for any need including retirement. There is no need to label and specify, unless that itself serves as a motivator. Insurance is protection until those assets are fully built. Begin with a simple formula of 20 times your current annual expense as your target asset size (including your house).
The nice thing about the mid-thirties is that the best is yet to come. By the time you hit the 50s and reach your peak earning capability, you will look back with satisfaction at what you have built.
(The writer is Chairperson, Centre for Investment Education and Learning.)