REFLECTIONS

Where is the Money?

I guess if you are like me you are tired of seeing these financial advisors deal out advice on money saving, investing etc. because none, I repeat, none of it is realistic. Have you ever seen any advisor tell you that include a job loss in your plan, include years of no paychecks etc. No - they simply start with a base income and tell you how much you need to save per year to get to your $ 1 M. No realities, like quitting a job to take care of the family, etc. etc.

Outlined below is a scenario which captures one scenario. Depending on the response to my blog I shall add some more. The idea is to let people know that it is not their fault that they are behind in the race, it is just that the race itself is difficult and needs a lot of focus for anyone to come ahead and for success, luck is a critical ingredient.

Tom graduates with a Bachelor’s in Business and starts working at the age of 22 for a starting annual salary of $ 38000. He has a student loan of $ 22000 to pay off. He is practical and drives an old car (that runs well) that he bought in his final year of college. He saves a total of $ 18000 after three years, and has brought down his loan amount to $ 18000. His salary has increased after three years to $ 44000 per year. His car has given up and he buys a decent used car for $ 6000. That leaves him with a saving of $ 12000 at the age of 25. By the time he is 30 he is married, has a wife (Julia) and a child and has a savings of $ 15000 and a credit card debt of $ 3000. His wife also works for three of these five years before deciding to take a break and be with the child, Her average income in these five years is $ 28000 and she has a saving of $ 8000 with no separate credit card debt.

This means that at the age of 30, Tom and Julia have a total savings of $ 23000 and a credit card debt of $ 3000. They start saving for a home – the plan is to own a home by the time Tom becomes 35. Tom has switched jobs etc. and by the time he is 35 he draws an annual salary of $ 50000. Julia is also working and again has worked for three of the five years drawing an average compensation of $ 35000. Their savings have grown from $ 23000 to $ 58000 (including 401(1) k, investment returns etc.) and his student loan is down to $ 3000 by the time Tom is 35. They buy a $ 300000 home with a 10% down and take a PMI. By the time Tom is 36 his family savings are more like $ 25000 (of which $ 20000 is in their 401(k)s).

This is when crisis hits. Tom is laid off – the market collapses, his house price has fallen below $ 250000 – their combined 401(k) is reduced to $ 7000, their credit card debt has gone to $ 5000, the student loan is $ 2500 and they have to survive on Tom’s unemployment check and Julia’s income. A year goes by and Tom has not found an opening. He has enrolled in courses to look into other areas. He is also considering business. At 37, he is at a cross-road in life.

Tell me folks, where is the money? And what on earth could Tom and Julia have done differently?

posted by sekhar @ 1:44 AM