Jagoinvestor

July 23, 2012

First 5 yrs of your earning life – Does it matter ?

A lot of people complain that they do not have much wealth in their life despite earning from many years. This brings an important point in question. What did they do in the first 5 yrs of their earning life? It’s very clear that the first 5 yrs of your earning life leaves a very big impact on your future financial life. Your financial life shapes a lot due to the first 5 yrs of your financial life.

There are 3 possibilities

  • A person has saved & invested a maximum of his earned money in first 5 yrs
  • A person has spent a lot of his earnings in the first 5 yrs.
  • A person has kept a balance between his spending and investments/saving in the first 5 yrs.

Are you one of those who started young with a nice paying job, but did not focus on your first 5 yrs or are not focusing on it right now. You feel the future is so promising and your abilities/expertise are so great that you don’t need to worry so much. It happens because at times people are seriously unaware and ignorant that life turns out very differently then they think. There are many events which demand money and attention at any cost. These are some times unplanned or just popup in life if you had not planned for it before – like Job loss, Marriage, Sudden health-related expenses, etc. The moment these events happen or come near, then you realize – “Oh my god – I never planned for it or I underestimated how much money I will need”.

In my book Jagoinvestor there is a chapter where I explain how your first 5 yrs investments, out of a 30 yrs period make the 50% final corpus and rest another 25 yrs makes another 50% corpus. That means the initial 16% tenure makes 50% corpus and later 84% tenure builds rest 50% corpus – (read sample pages)

So if you are 5 yrs late in saving and investing for your retirement – You will end up with 50% less in your retirement – This might not sound too scary, but it is. This could mean looking for a part-time job compared to an enjoyable retirement without much tension. There is a big difference between what 50% less corpus can do. It’s like earning Rs 30,000 per month from next month compared to Rs 60,000 right now, imagine your life from next month.

Early years of your earning life

 Spending Maximum vs Investing Maximum

Let’s talk about the first two possibilities mentioned above – “Spending Maximum” vs “Investing Maximum” . Let’s say there are two guys who earn 75,000 per month. Both are unmarried (we all are, at the time of getting a job and next few years, possibly 4-5 yrs) and have similar conditions.

The first guy operates from the mindset of  “Life happens now and this is the time to spend, who knows about future , however, the other guy operates from the mindset of “Life is uncertain, I can save today so that I can protect my future now”. Both are ideologies and the way you think, but it can have a drastic impact on your life. Because your financial life operates like a chain reaction. What you do in the first year, has some impact on 2nd year, what you do in 2nd year affects your 3rd year and so on, obviously assuming that your pay rise is natural and not shoots from 3 lacs per annum to 13 lacs per annum in short term.

If you are struggling to make a down-payment for your dream house TODAY, you can clearly see your early 5 yrs have been and identify that point where you could have been more responsible, where you could have given your financial life a new direction and shape. If you are not able to fulfill your big goals coming soon, it’s a clear indication that you have done something wrong in the first 5-6 yrs of your financial life or early years. In the same way if you are at peace today, you can clearly identify what right things you did at the start of your career.

Real-Life Experience of Saving Early in Life

One of the readers Ashish shares his experience about how he saved early in life and how his life is right now.

After completing my study in 2004, I started my career in IT industry. Three thing was clearly injected in my mind by my father :-

1) Always maintain the cash for emergency. As in emergency cash is primary and relation is secondary.
2) Never go for loan. If you need money, first check with your relative and don’t mind paying interest on the money you owe from them. It will always be cheaper then bank. If no help available, consider the thing is not worth to invest.

3) Respect your money.

Though I am not obedient son of my father but “Money matters”. So I started maintaining one excel sheet about my expanse. I must say with my experience that daily expanse is not cost you more if you spend smartly. So at the start of my career, I compromised on my comfort level. Instead of staying in separate house, I searched for shared accommodation or PG which really helped in saving a lot. Instead of buying bike, I calculated my per-day travel expanse and tried my best to minimize it by sometime taking lift with office colleague :)

Travel and Stay is the biggest expanse as per my experience and this clicked me an idea of buying a house. I was not capable enough to buy the house, so instead of taking loan from bank I knocked my father’s door and able to convince him on 4% interest rate(following papa’s advice). No need to say that I paid 4% or not, but he is happy to see the value of that flat on today’s rate. But I was not able to stay in that house for more than a year as I changed my job very frequently(at least once or twice in a year) and happily rented so far.

I travelled from Gurgaon–hydbd–Noida–Pune–Mumbai and then finally got chance for onsite UK in 2008. I applied the same logic and maintained at least 1 lac saving per month. And the story continued since then on saving more and spending less. With this, I am able to manage to renovate my own house for my parents (which they call now as my house officially :) )

Then I married in 2009 on my own expanse and came back to India last year when we both thought that there is no place better than India on this earth. And it get proved as well, when my wife also got the job in same company and same building :) . Before coming to india, I showed no interest in paper form investment except ppf and property investment. But after becoming the member of JagoInvestor and reading some well written and advices article, I did another smart investment. 60 + 40 lac term insurance for me an my wife from two different company. One personal accident insurance of 40 lac from LnT for myself.

SIP of 8k per month in different MFs , which I considered after reading one of the article on jagoinvestor where the comparison was made with child plan and other investments and purchased one villa plot in Bangalore. So far no Loan :) . So far the story is this but adding new pages everyday… I know there are more happy family out there but just want to say that “Saving does help not hurt”.

I would say your life has a constant amount of comfort in your financial life, it’s your choice when you want to have it, at the start of later years or keep a balance in start and end. The best approach I feel is to 1st year your earning life to yourself, enjoy, spend and do what you always wanted. After the first year just get damn serious ! .. What do you think?

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Vijay
Vijay
9 years ago

Hi Manish Chauhan
I have an PPF account (from past 5 years) and I am contributing every year some 30k.
and also LIC myna me and wife name with sum of 50k.
New member joined my family (daughter).
Is starting Sukanya Samriddhi account on her name is good or same can contribute in PPF .
please give me your valuable advice

Kumaraditya Sarkar
Kumaraditya Sarkar
10 years ago

Hello Manish Ji,

I’m an avid reader of your blog since long. I’ll turn 26 this October, but I don’t have any proper job yet. I’m doing Ph D in English, and hope investing in academic degrees now will lead to a steady job within 2 years like teaching in a college.

I earn some paltry sums though. As a part-time teacher in a college, plus a part-time blogger, I make roughly 10-12 thousand per month, which I’ve been earning for about 2 and a half years now. I don’t see the need of a term plan right now, since I have no dependents and live with my parents. I’ll go for it when I marry. Apart from that, what I could save so far is:

1. Roughly 2.5 lakhs in FDs of various tenures. 1.5 of it is for 10 yrs.
2. Opened a PPF this year, contributing 2500/month since April.
3. 500/month SIP in SBI Emerging Business (G)
4. Though not SIPs, I manually invest 1500-2500 per month in various MF (UTI Opportunities, SBI Bluechip, SBI Pharma – all Growth, Direct)
5. Opened a Demat a few days back with 10k, just trying to learn. Invested in some large caps. Following Moneycontrol and Sharekhan stock tips.
6. 1000/m RD for 3 yrs + Flexible RD (base amt 500 rs) where I put away 500-5000 per month (avg 1000) depending on availability of funds. I put away extra earnings like cash gifts, seminar TA etc there.

I am seriously considering:

1. Getting a low-stress low-pay job while I finish my Ph D and go for my dream jobs in academics (I’m trying at the banking sector. The corporate world is not my stuff. Apart from money, I need time enough to read, write, blog, socialize, think, travel and do lot other stuff).
2. Allocating 1000/m in commodity (pref. gold) from next Jan. SBI Gold ETF seems a good option.
3. Increasing PPF contribution to 5000/m from next FY. I see it as my retirement tool.
4. Cutting down my monthly expenses which is now about 1500-2000 including internet, travel, garments, books & so on.
5. Start a LIC term plan for 20 years when I am 30, with 1 crore sum assured. Beyond that, I don’t think I will need a cover.

NB – Both my parents are university professors. My father has 3 years of service left, mother has 7. My brother is mentally handicapped so I’ve to take his responsibility in future. Presently my parents’ savings are around 50 lakhs, a house, a car with garage. My mother has no siblings and will inherit her paternal house.

Am I going in the right direction? I would so much love to have your response.

Regards,
Kumar.

Kumaraditya Sarkar
Kumaraditya Sarkar
Reply to  Jagoinvestor
10 years ago

Thank you very much for your quick response Manish Ji. Yes, I also felt I was over-diversifying. So as you said, I will focus on PPF as debt and MF as equity. Closing existing RDs will attract penalties so let them continue, but I won’t make a new one now. I opened demat account to invest in SBI GETS for hedging purpose.

Currently, my MF portfolio has UTI Opportunities (G), SBI Blue Chip (G), SBI Emerging Business (G), SBI Pharma (G) that is 2 large caps, 1 small-mid cap, 1 sectoral. Is that good? Or should I get rid of any?

Kumaraditya Sarkar
Kumaraditya Sarkar
Reply to  Jagoinvestor
10 years ago

Thank you!

Nitin
Nitin
11 years ago

Please suggest, My salary is 20,000. To start with SIP, which plan & How much to be invested?
Thanks in advance…….,

Niranjan
Niranjan
11 years ago

Manish,

Nice article but i partially agree because the fact of first 5yrs in you earning have impact is true but these 5yrs earnings also be crucial for many other occasions in in indian youngster’s life where he/she be dependent on parents till 21 and gets married at 28 or before on average.
Just to share my own case i started working in MNC @21 years for <8K/month salary with no idea of what is a financial planning was about.it took me 4yrs just to cover myself and my dependent parents needs and sister marriage into a safezone. and another 1yrs to make 1 yr future planning/securing. now am 6.5 yrs experienced guy fortunately got abroad position so secured life and a bit of investments and planning of so called DREAM home,retirement,marriage,entrepreneurial explorations etc in progress .. in my feeling for a middle class youngsters in india,"value for money/earning" lessons should start way before getting into a job may be at 16yrs and govt should provide opportunities for youngsters to learn.so that your calculation will become first 10yrs of earnings in life than first 5yrs.. just my thought 🙂

Bala
Bala
11 years ago

Very good article dude…Its a wakeup call for guys like me to invest money in a proper way.Thanks

Sukhvinder Sidhu
Sukhvinder Sidhu
11 years ago

Thanks Manish! Very good article for guiding the younger people on the importance of first five earning years.

In our times there was no such guidance. Although I also saved and did not spend undue, but the earlier investments were mainly to save taxes. But such articles indeed guide today’s youth very well. I will recommend to my brother and his colleagues to read the articles on this blog.

Sanghmitra
Sanghmitra
11 years ago

Hi!

Please note that apart from campus-placed employees, many of the freshers struggle to survive in their first 2-3 years. The hop for a right career does not guarantee a regular income. These kind of salaried people are bound to think of investment at later stages.

Anand Sarin
Anand Sarin
11 years ago

I am 25 years of age. I am working in a PSU for last 6 months and I get about Rs. 35000 per month in hand. I wanted to know what are the best financial planning options for me??

Anand Sarin
Anand Sarin
Reply to  Jagoinvestor
11 years ago

I am very new to the world of financial planning. So i want to know how much i can save with this amount of salary and where.

Anand Sarin
Anand Sarin
Reply to  Jagoinvestor
11 years ago

Rs. 35000 per month. I wanted to know what will be the best possible options for investment for me. I am 25 years of age and unmarried. Thinking of marriage after 3 years. Started working 6 months ago in a Public Sector Undertaking company.

bisprad
bisprad
11 years ago

The real life example cited in the article – Mr Ashish – does he even live ? From his description and the note of pride in his writing, I have serious doubts if he has any life apart from saving up
Do you really thing his life is worth emulating ? Filching rides from office colleagues daily – if he is proud about that, well I dont know what to say

Muthu Krishnan V
Muthu Krishnan V
Reply to  bisprad
11 years ago

would agree with bisprad, staying in shared PG is okay, but saving money by riding on somebody else’s back is NO good unless you share the expenses. I have seen similar people unfortunately.

Muthu Krishnan V
Muthu Krishnan V
Reply to  Jagoinvestor
11 years ago

I would say means are as important as the end.

My personal situation was a lot different compared to others and I had to make innumerable sacrifices in the first five years. but now i am proud to say that I have no loans, have one flat and one independent house and have a decent amount of savings equal to two times my CTC.

only mantra is live below ones means and savings will happen automatically.

Saikat
Saikat
11 years ago

Hi Manish,
Chanced upon this treasure trove today only.
Can’t thank you enough for this commendable job you are doing by educating mass.
Now coming back to my financial life, I need some honest suggestion from you.
I am 24 and my earnings/expenditure leaves me with 15k per month.
I have 2 goals:
1. Rs 4 lacs after 3 years for the downpayment of a flat( I am thinking of starting a RD of 10,000 from this month for this)
2. Need to invest 70,000 each year for tax savings (currently have a RD of 5,000 which matures at the end of f year and I invest that in PPF).

I also want to start investing in equity through SIP but my short term goals not permitting to do so.
Please suggest if you feel there is some alternative way of realizing my short term goals as well as start investing in equity.
TIA.

suresh
suresh
11 years ago

Hello Manish, I read the book-JagoInvestor. I am not clear with the Ajay and Vijay Example cited in the book. Vijay invests 1000 per month for 30 years @ 12% per annum and end up with 36 lacks. Ajay invests 2000 per month for 10 years @ 12%per annum and leave the amount for remaining 20 years @ 12% per annum and end up with 45 lacks. This is not possible. Please explain with the Formula of Recurring Deposit/Fixed Deposit on how you arrived at such amounts?

Shankar
Shankar
11 years ago

Thanks a lot for the wake up article… I would like to share my personal experience. I have been working for last 7 years but I realised off late that my savings ratio is very poor… I got married last year and I became serious from then as my wife is not working and I feel the pinch of my mistake every day now … though I had saved for my marriage I realised that my savings was towards and “expense” and not an “asset” … i did some math and found out that my current net savings which could be used for buying any asset is just 20% of what I had earned in last 7 years …. currently i need to buy a house as my parents are also staying with me but i am unable to afford the down payment ….my advice to all the freshers is that please decide on your savings rate when you start working(percentage of your take home salary)…. and then stick to that savings every month … ensure meet your savings target as soon as the salary comes to your bank ….. and plan your spending in the remaining money ….also ensure that your savings is used for an asset and not for an expense (buying car is an expense and not an asset ) … As Robert Kiyosaki says – “Pay yourself first” ……

Shankar
Shankar
Reply to  Jagoinvestor
11 years ago

Hi Manish
I am allocating 30% of my salary every month towards savings every month – SIPs in Gold ETF and Debt Mutual Fund. I have also made investment in the begining of financial year in ELSS to save tax under Sec. 80 C. I have decided to stick to this my savings target till I accumulate enough money towards down payment of house.

Deepa
Deepa
11 years ago

Hi Manish,

Thanks for a thought provoking article, specially for the youngsters who are about to start their career.
This is an excellent guidance for them on how to start a healthy financial life. I too missed to save a good amount in first 5 years of my career due to many factors viz. ignorance, not getting guidance for right financial instruments etc..

I shall recomment this article to all freshers who are gonna start their career as well as their financial life..
Thanks
Deepa

Vandhana Karthick
Vandhana Karthick
11 years ago

Manish..Many of the people traps to situation and many of them do not go to right correct opportunity to prove themselves..In this competitive world talent and result makers lead the race.Financially many of them are weak which this also may be the reason to sort talent guys..

Nitin sharma
Nitin sharma
11 years ago

Hi Manish,

Very nicely done article. Simple yet everybody can relate to it.

I didn’t exactly splurge but didn’t have any set plan for savings, so I am not sure where that money exactly went. My salary now may have increased many fold but I think if during first 5 yrs if I had a plan in place say some SIP’s, portion to PPF ,bought house early on as it was cheap then (looking back today)etc, I would have been much better.

But anyhow I am 33 right now and have time to still catch on as much I can.
Thanks
Nitin

Vaibhav
Vaibhav
11 years ago

Great article Manish…….

Let me share my experience…..I am completing 5 yrs. of my earning life after 6 days…:)

First and important thing, I have saved and invested good amount.

Bad thing is I was not aware about where, when and how should I invest, in early 3 – 4 yrs. of my career. Hence all the 5 yrs. I had few lacs in my saving a/c.
Also I was in LIC trap and have 2 traditional policies and 2 ULIPs. And one more I had too many debt investments for Tax saving purpose.

Good thing is, I have taken a flat recently(with help of Loan and savings in a ratio 60:40), have a policies worth current Surrender value 1.5 L, other tax saving debt instruments around 2L.

Now I am correcting my mistakes, surrender LIC, take pure term plan and invest into equities and debt in apropriate proportion.

Prakash Patel
Prakash Patel
11 years ago

As per my opinion, everyone should have a very good saving plan in his initial life. And i assure you, your life become very happy, joyable & tention free, and ultimately you live longer….

Krupal Patel
Krupal Patel
11 years ago

Hi Manish,

I earn 45k per month.
I am unmarried.
I spend 20k as my monthly expense in bangalore.
I spend 40k PA in LIC.
I have 15K which i invest in Share market.
I do have 5k with me which is not used in anyway.
Q1: What steps should i be doing to make an aggresive portfolio?
Q2: Where should i put thr 5k?

Thank & Regards,
Krupal Patel

ASHISH
ASHISH
11 years ago

Sure and thanks for giving me the space in your blog to write something.
After completing my study in 2004, I started my career in IT industry. Three thing was clearly injected in my mind by my father :-
1) Always maintain the cash for emergency. As in emergency cash is primary and relation is secondary.
2) Never go for loan. If you need money, first check with your relative and don’t mind paying interest on the money you owe from them. It will always be cheaper then bank. If no help available, consider the thing is not worth to invest.
3) Respect your money.

Though I am not obedient son of my father but “Money matters”. So I started maintaining one excel sheet about my expanse. I must say with my experience that daily expanse is not cost you more if you spend smartly. So at the start of my career, I compromised on my comfort level. Instead of staying in separate house, I searched for shared accommodation or PG which really helped in saving a lot. Instead of buying bike, I calculated my per-day travel expanse and tried my best to minimize it by sometime taking lift with office colleague 🙂
Travel and Stay is the biggest expanse as per my experience and this clicked me an idea of buying a house. I was not capable enough to buy the house, so instead of taking loan from bank I knocked my father’s door and able to convince him on 4% interest rate(following papa’s advice). No need to say that I paid 4% or not, but he is happy to see the value of that flat on today’s rate.
But I was not able to stay in that house for more than a year as I changed my job very frequently(at least once or twice in a year) and happily rented so far. I travelled from Gurgaon–hydbd–Noida–Pune–Mumbai
and then finally got chance for onsite UK in 2008. I applied the same logic and maintained at least 1 lac saving per month. And the story continued since then on saving more and spending less. With this, I am able to manage to renovate my own house for my parents (which they call now as my house officially 🙂 )
Then I married in 2009 on my own expanse and came back to India last year when we both thought that there is no place better than India on this earth. And it get proved as well, when my wife also got the job in same company and same building 🙂
Before coming to india, I showed no interest in paper form investment except ppf and property investment. But after becoming the member of JagoInvestor and reading some well written and advices article, I did another smart investment.
60 + 40 lac term insurance for me an my wife from two different company (as mentioned in one of the blog here).
One personal accident insurance of 40 lac from LnT for myself.
SIP of 8k per month in different MFs , which I considered after reading one of the article on jagoinvestor where the comparison was made with child plan and other investments
and purchased one villa plot in Bangalore. So far no Loan 🙂
So far the story is this but adding new pages everyday…
I know there are more happy family out there but just want to say that “Saving does help not hurt”.

sayan
sayan
Reply to  Jagoinvestor
11 years ago

@Jagoinvestor Chauhan- Ashish said that he was inspired to start investing in MFs thru SIP after reading one of the article in jagoinvestor… which article is he talking about?

ASHISH
ASHISH
11 years ago

Very well written article and remind me of my story to feel proud of myself.
In my 7 yrs of career, I have two house and well settled and protected family. Few more investments are there which include plot, ppf, SIPs. To be honest, onsite tour really helps when you are bachelor in all way 🙂
Just to prove that point mentioned by Manish actually works.

When you have money, you have two option :-
Spend smartly OR just spend.