First five years of a job

In my previous post, I briefly talked about the percentage of income that can be saved by people who have just begun a job. In this post I will take that thread forward and talk about the milestone that such a person would reach five years into his job.

The Scenario

We look at the case of a hypothetical person, Arun who is reasonably well to do. Arun begun with a post tax salary of 50,000 per month five years ago (at the age of 22) which has since increased to 1,00,000. Further, Arun was lucky not to begin his career with significant financial responsibilities.
Just after passing out, Arun was not sure whether he wanted to study further, change his field nor what kind of work he would like. He was campus placed into a reasonably good firm which he changed after 2 years. His income grew steadily from 50,000 to 1,00,000 which averaged 14% annually. Given that inflation was over 8%, this was good but not exceptional.

Spending pattern

Arun's spends around 30% of his salary; one-third on rent, one-third on living expenses and the remaining on discretionary expenses. The rent and living expenses are low because he shares the rent with three other friends who are his room mates. He has not made any major capital purchases (vehicle, furniture or appliances). Neither has he invested in real estate.
His savings are primarily in EPF where the monthly contribution (his and employers) is Rs 10,000. The EPF balance is currently Rs 6 Lakh. Beside he has invested in the stock market via SIPs on an index funds. These accounted for half of his salary and today the corpus amounts to over 30 Lakh. He has an FD of around 5 lakh and a saving bank account balance which averages around 1 Lakh. He has no life insurance and only an employer provided health insurance plan.

Options

At his stage in life, Arun has a number of options open to him

1. If he finds that he is reasonably happy with and secure in his current job, he can purchase a house worth 50 Lakhs with a down payment of 10 Lakhs and 2 Lakhs being spent on legal expenses. Even if his salary remains the same and expenses double to Rs 40,000 (say because of getting married; the rent of 10,000 is saved), he will have savings of Rs 10,000 besides the EPF contribution. Together these will provide for his retirement while his remaining corpus of 24 Lakh can be used for other financial goals. This is something that would be called a typical life trajectory.
2. If he wants to change his career, he can go for higher studies. 5 lakhs will be sufficient for his living expenses for 2 years and the rest can be financed via an education loan (since these have tax benefits). But since he will still have a corpus of 36 Lakhs, his net worth will remain positive giving him a significant peace of mind.
3. If he wants to go for his own startup or professional service, again 5 Lakhs will be sufficient for 2 years living expenses and he will be able to invest around 12 lakhs into his venture. The remaining corpus of 24 lakhs will ensure that he still has something to fall back upon in case things do not work out as expected.
4. He could spend six months to one year traveling. While this may not appear to have direct monetary benefits, it can be highly educating and further would help Arun discover himself and what he wants to do in his life. The so called mid-life crisis at 40 may be avoided. Again this involve an expense of 16-17 Lakhs and allow a corpus of 24 Lakhs to fall back on.
5. If for some reason, there was an emergency in the family, Arun would be able to support to a significant extent. In a sense, this would have been the default path if Arun had significant financial responsibilities.

It is important to note that none of the last three options would have been available had a house been purchase an early age.

Takeaways

My takeaway from the above is that binding financial decisions - primarily the purchase of a house should always be delayed till there is personal clarity. A second takeaway is that liquidity of funds is important in ways that cannot be fathomed.
At a young age, it should be expected that wishes, hopes and aspirations will change significantly so the early financial decisions should be mode so as to increase flexibility.