Most queries I’ve received on Safal Niveshak over the past ten months have been from young men, either newly married, or already with one child. And most of their questions have revolved around…
- How do I start saving and investing money?
- How do I plan for a well-structured financial life?
- How do I meet my life goals?
While I have responded to these queries, here is the real life story of a close friend (let’s call him Ravi) who was in the same fix almost 9 years ago, how he has been progressing well towards his financial goals (at least what it seems as of now), and how he has grown his savings by a massive 9200% over four stages of his life.
Life Stage 1 (2003): Ravi got married
Fresh out of an MBA college, and fresh into his first job that did not pay much, Ravi got married to his long time love (notice his belief in ‘long-term’ here ).
Anyways, that was a start of a dream personal life, and a nightmarish financial life.
Ravi did not have any loan – home loan or credit card loan – on his head, yet his financial life wasn’t going in the right direction.
This was not because he was imprudent or rash with his money. The truth was that whatever he earned, was spent towards meeting his life’s daily needs – food, clothing shelter, travel…and of course, television, refrigerator, washing machine, mobile phone, eating out, and weekend movies (all ‘needs’ of a young and newly married).
In fact, after house rent (37% of his monthly income), his miscellaneous costs formed around 25% of his monthly income.
At the end of the month, what remained in his bank account was just 2% of his net take home salary.
In short, he was living paycheque to paycheque…just scraping through to the next month with peanuts in his bank account.
Here is how his income was spread in 2003…
Life Stage 2 (2004): Ravi had a child
The year 2004 brought a couple of good news for the family. First, it was the birth of a daughter, and then Ravi got a salary hike.
Given the bad economic phase of 2003 and early 2004, he had not got a salary hike for full 18 months since joining his job. So when good times returned by the end of 2004, he got a salary hike that almost multiplied his net take home by 1.5 times (a daughter indeed is a very lucky omen).
So the disposable income with the family increased dramatically…but so did all the expenses (food, electricity, telephone, shelter…all became expensive).
But a couple of good things happened here.
Before the salary hike, the family was spending first and saving later. In other words, Ravi saved whatever was left at the end of the month after meeting all his monthly expenses.
Good sense prevailed after the salary hike, and he started saving first – he allocated some money to start SIPs in a few mutual funds – and then used the rest to meet his household expenses.
Here is how his income was spread at the end of 2004…
As you can see from the chart above, the most notable number here is the one under ‘Savings’. It moved from just 2% of income in 2003 to 29% of income in 2004.
You might think that a large part of this increase in savings was due to the salary hike, which is true.
But more than that, the rise in savings was led by the ‘willingness’ of the family to save first and spend later.
They did not compromise on their lifestyle (they still spent money on entertainment, travel, and other material luxuries that they could afford), but this was only after they had taken care of their savings.
Since the family was bigger now, and there was a ‘need’ to own a house in a few years, a part of the monthly savings (almost 75%) went into a fixed deposit (that was specifically created for meeting the down-payment for the house).
Thanks to the increase in salary, Ravi was now in a position to gift his wife some money every month, and also bought some term insurance (as shown in the chart above).
As he explained to me, the reason he bought term insurance was this – given that he was the sole earning member of the family, he had to ensure that his family’s future was not compromised in case he died soon.
This I think was a very valid reason why he chose term insurance and not any worthless products sold under the garb of insurance.
Life Stage 3 (2006): Ravi bought a house
Helped by salary hikes and disciplined saving and investing for two years, Ravi now had enough money to pay for the down-payment of a house, which he bought in 2006.
He thought that house prices were high at that moment (in hindsight, he sees that purchase as a great decision as house prices have risen by almost two times since then), but still went ahead with the purchase…largely to bring some comfort and confidence in his life (the ‘roof on your head’ theory).
So while he was paying 20% of his salary as house rent in 2004, he started paying 26% of his salary as home loan EMI in 2006 (which was a reasonable proportion of income going towards EMI).
Apart from this, as you can see from the chart below, one other account was added to the household expenses – that of ‘education’. The daughter was now in pre-school and thus her education and other related costs now formed around 2% of the family’s monthly expenses.
Ravi also increased his term insurance cover to take care of his home loan liability, and also to cover the rise in his household expenses.
While his savings now dropped to 20% of income (from 29% in 2004), this was a comfortable setting as some of the previous savings were now diverted towards the home loan EMI.
Here is how his income was spread by the end of 2006…
Life Stage 4 (2011): Ravi quit his job
Tired of a corporate life, long hours of travel, and running a constant rat race, Ravi quit his job in 2011 to work towards his passion, a dream he had nurtured all these years.
However, despite having a roof over his head, and home loan repaid with the help of a large part of his past savings (and some help from his wife’s savings), he first thought it was foolish of him to leave a high paying job for an uncertain life (uncertain in the financial sense).
But this was till he saw this…
With a business earning in 2011 almost equal to his salary of 2007, Ravi was still able to save 146% more than what he was saving five years back!
This was thanks largely to the repayment of housing loan, and some prudent cuts in expenses on eating out, movies, telephone, and other miscellaneous stuff.
As you can see from the graph above, his monthly savings were around 47% of his monthly income in 2011, much-much more than it was any other time in the past!
So Ravi seems to be on the right track to his financial freedom.
What is more, he now gets to spend more time with his family and friends, and pursue his passions…while not worrying about money anymore.
His bank account may still seem inadequate, but his life is far, far richer.
That’s entirely because he chose to save and invest before he spent (and did this continuously for a long time), instead of the other way round.
“This is fiction, isn’t it?”
It’s good that you asked this question.
As I said at the start of this post, this is a real-life story.
You still don’t believe?
What if I say, “It’s my story!”
Would you believe now?
Indeed, the ‘Ravi’ in this story isn’t Ravi for real, it’s me…and what you read above is the story of my financial life and actions across different life stages.
(My wife might never read this post, but she remains the biggest hero of my life (for supporting me in all my decisions)…followed by my daughter (for being my lucky charm)…and my mind and stomach (for making me aware of my true being and then helping me reach a state from where I can share this story with you).
“Okay, but how do I increase MY savings by 9200%?”
Good you asked this question, as I forgot to answer this above.
9200% is the amount of increase in my savings between 2003 and 2011!
The number for you might be different, but that isn’t the big idea here.
The big idea is that if you are at a life stage that resonates with any of my life stages shared above, know that you already have within you the power and intelligence to direct your financial life the way you want it to.
What you need to do is just this – earn, then save and invest, then spend…and do this with discipline for a number of years.
Just do it! I would love to see you beat that 9200% number.