Prashant Kumar, 25, came to us with an unusual request. He did not want to be in the same situation as his long-time idol, Raj Kiran, who was now 41. Like Kiran, Kumar had also studied hard and landed himself a comfortable job. Kiran had earned well and spent lavishly.
But at 41, he was finding it difficult to meet his household expenses. A big part of his salary was consumed by a home loan EMI. He was still paying off a personal loan that he had taken a few years ago. In addition, he had to pay Rs 15,000 a month for his children’s school fees and coaching classes. His wife needed a car but Kiran could not afford to buy one. Kumar was clear that he wanted to avoid a similar situation.
We assured Kumar that the situation was entirely avoidable if he followed a few prudent steps today. To begin with, we suggested that he save between 50% and 75% of his take-home salary. To achieve this saving, we recommended that he make a household budget and follow it to the tee.
The budget could, of course, include certain amounts earmarked for luxuries. However, the total expenditure should not exceed 50% of his budget. This is because it is possible to save significantly in the early years of a career since liabilities are at their minimum.
We also advised Kumar to take a home loan to buy the largest apartment he could afford. We told him to ensure that the duration of his home loan was the minimum. Ideally, we wanted him to take a loan that could be repaid in seven years or so. This keeps the interest costs to a minimum.
Since upgrading to a larger home later will involve significant transaction costs, it is best to buy the largest possible house initially. By the time Kumar gets married, he is likely to own the house. We also advised him against taking personal loans, since they carry a very high rate of interest and do not help in building an asset.
The remaining savings should be invested in equities on a monthly basis. These savings will grow to a handsome sum by the time he turns 40, allowing him to buy a second car or pay for his children’s education. We also suggested that he contribute the maximum of Rs 70,000 a year to the Public Provident Fund. At 8% interest, tax free, the PPF will hold a corpus of Rs 21 lakh when he turns 41.
He will be significantly better off than Kiran at retirement. Assuming that both Kiran and Kumar start saving Rs 25,000 a month from today, at age 60, Kiran will have a corpus of about Rs 1.2 crore while Kumar will have over Rs 5 crore (at 8% annually). These are the benefits of an early start.
DIET CHART FOR THE 20s
Veer Sardesai, CEO, Sardesai Finance. He can be reached at ceo@sardesai.com.
