Two polarising careers, A Plumber VS a Doctor.
In the local context, let’s use the plumber to represent the population of Diploma holders with no/little debt incurred.
The doctor represents the population with specialised Degrees (like Medicine, Dentistry, Law, Architecture…) with university loans, someone on the other extreme end of the spectrum.
Today, we simulate how they accumulate their net worth, the age both occupations balance out in terms of wealth as well as discuss certain variables that could implicate their journey to Financial Freedom.
In the Food for Thought section, we touch on Lifestyle creeping and the ‘Should I get a degree’ dilemma.
Assumed starting age
Let’s say that both individuals start off at the age of 20.
After completing tertiary education, one decides that he wants to be a plumber and the other decides to become a doctor. Let’s also assume that each profession has pay increases that also increase with inflation.
Plumber starts work at the age of 20
The Plumber starts off as an apprentice at 20, making $2,000 monthly after CPF (total pay $2,500).
He does not have any liabilities or dependents who rely on him for financial support, thus invests 50% of his income, $1000.
The plumber didn't go to University so he has no outstanding student loans and debt, thus can begin making and investing money right off the bat.
5 years later he turned 25, got a pay raise and started making $2,500 a month after CPF (total pay $3,125). These numbers are roughly closely reflecting a salary scale we found.
He’s now able to invest $1250 per month.
Source salaryexplorer
At 30, he gets another pay raise, bringing home $4,000 after CPF.
He also got married and had kids, hence could no longer invest 50% of his income and support a family. Thus, he reduced his investment sum to $1000 (25%).
At age 35, with years and years of expertise, his company once again promotes him to a Managerial position, earning him $5000 monthly after CPF. He continues investing 25% of it, $1250.
The plumber continues to work till his retirement at age 65.
How much networth has the Plumber built over the years?
The Plumber has been earning a steady income since the age of 20 and did not have any student loans to pay off. Thus, he could start accumulating his wealth very early on.
Investment trajectory will be from 20 to 50 years old and at a 5%p.a and 8%p.a return.
Investments at a 5%p.a return:
Investments at a 8%p.a return:
Doctor graduates to work at the age of 25 and starts investing only at age30
The doctor’s education and work path differs as he enrolled into University at 20.
Let’s say his 5 years of an undergraduate education cost $30,000 per year so at 25, the doctor is worth
(-$150,000). Whether this school loan number is accurate or not depends on whether the education is done in Singapore or overseas and what degree it is exactly.
He does not generate any income while schooling, hence starts saving and investing until much later in life.
At 25, He starts off as a houseman, taking home $5,000 a month. He pays $2,500 monthly in student loans and does not start investing till he repays the full amount.
At 30, he finally qualifies to be a specialist and earns $12,000 a month.
He gets married as well and has kids of his own. With his massive pay jump, the doctor now starts investing 25% of his monthly income ($3,000) while financially supporting his family.
At 35, he qualifies to become a consultant and receives another pay jump to $16,000 a month after CPF. He invests 25% of his monthly income, $4,000.
At 40, let's assume his career progresses even further to earn $22,000 a month after CPF and he invests $5500 (25% of his income).
The Doctor continues to work till his retirement at age 65.
How much networth has the Doctor built over the years?
At age 25, the doctor is worth -$150 000 due to student loans. He manages to pay the full amount within 5 years in monthly installments of $2500, which makes his net worth at age 30 $0.
Investment trajectory will be from 20 to 50 years old and at a 5%p.a and 8%p.a return.
Investments at a 5%p.a return:
Investments at a 8%p.a return:
When does the doctor become more wealthy?
With a higher savings net amount and assumed investment rate to be the same, you'd expect it being a matter of time before the net worth of the doctor is higher.
And you are correct, but let's also try to quantify it.
Investments at a 5%p.a return:
At age 40, the Plumber’s net worth is $456,036.86 and the Doctor’s is $533,852.92 so both individuals ended up balancing out at age 37-38.
Investments at a 8%p.a return:
At age 45, the Plumber’s net worth is $1,057,508.45 and the Doctor’s is $1,331,275,98, so both individuals ended up balancing out at age 41-42.
What about financial independence for both occupations?
Financial independence or financial freedom is a point whereby your investment income can satisfy your expenses.
It means that you don't need to work to support your lifestyle. Quite simply you can retire.
At TheAstuteParent, we try to help everyone to work towards it, regardless of your occupation or starting point. With low job security these days, financial independence means less stress on paying off your bills .
To learn more, we've a full explanation here: https://www.theastuteparent.com/2019/04/financial-independence-fatfire/
For the plumber, at age 50, his monthly expenses is $3,750 (75% of $5,000). The amount needed for financial freedom would be $3,750x12x25=$1,125,000.
He would have amassed $945,199 (5% investment projection), which means he is CLOSE TO financial independence. Congrats! =)
For the doctor, at age 50, his monthly expenses is $16,500 (75% of $22,000). The amount needed for financial freedom would be $16,500x12x25=$4,950,000.
He would have amassed $1,733,313 (5% investment projection), which is FAR LESS THAN THE AMOUNT NEEDED for his financial independence.
Food for thought: Is your student loan worth the future income?
Personally, I would say that the loan is worth the future income.
Getting a degree is expensive, but from the experiences of friends and family, it puts you on a societal pedestal and immediately kick starts your career upon graduation.
Although career progression is largely based on the profession you choose, education can play a vital role in it as well, opening more windows of opportunities in the long run.
A friend once told me that ‘Education is just an investment for your future’ and I used to think that only the wealthy and privileged could afford to think that way.
Over the years, I’ve realised that there is some truth to it. Of course the loan will definitely be a huge burden. But if you weigh the pros and cons, the pros outweigh drastically.
Understanding lifestyle creep: Why doesn't the doctor invest more?
The doctor earned $22,000 monthly from the age of 40-65 but only invested 25% of his income.
He could’ve easily afforded to invest 50% of his income and live comfortably while supporting his family. Well, high income can come with high lifestyle expectations and large expenses too.
To read more: https://www.investopedia.com/terms/l/lifestyle-creep.asp
Conclusion
The doctor is NOT necessarily wealthier at age 35.
Without going to university, the plumber could have already spent that time acquiring 4 more years of work experience and investing money well.
Also, a higher net-worth does NOT equate financial independence as seen in the explanation for financial independence for both occupations.
On the other hand, studying for a specialised degree to get the opportunity for a good career can still be a good choice and very likely the better option in the long term.
Hence, the choice of attaining a university education is a personal one, and varies from every individual.
Last updated on March 28th, 2020 at 02:27 pm