When the home loan is finally paid off, it won’t be wrong to say that the borrowers would feel lighter. Many consider large loans outstanding (like in home loans) as a hanging sword and want to get rid of it as soon as they can.
That said, what next?
Since your home loan is done and dusted, what next should you do with the money that is freed up because there are no EMIs to pay now?
Many people start planning to purchase another house on loan. And they may have their own reasons for doing that. But what if you don’t want to get burdened under EMIs again? What are your options then?
First things first. If you never gave the emergency fund the importance that it deserves, then this is the first thing you should start correcting. You may not feel the need for keeping a contingency buffer but remember that it’s like an umbrella. It’s better to have it because when you need it and you don’t have it, then you will have a tough time.
So, if your emergency fund needs to be started or increased in size, then use the monthly surplus (that is freed up from EMI stoppage) to install your emergency fund. The minimum that you should aim for is having 6 months’ worth of expenses as an emergency buffer. So, if your basic living expenses are about ₹75,000 per month, then try to keep an emergency fund of ₹4.5-5 lakh.
The second is to clear off other high interest loans. Ideally, this and the first step can be done parallelly. But I won’t want anyone to try to clear off all the loans first before starting on their emergency fund accumulation. Do it simultaneously. So if you have other high-interest rate loans, like personal loans at say 15% and credit card outstanding at 36%, then start clearing these off. Start with one which has a higher interest rate and once that is paid off, move on to the other.
Once the above two things are handled, next comes that you start investing properly for your goals. Say you are a 38-year old with wife and 7-year daughter in family and who has finally closed all loans and has an emergency fund in place, it is now the time to start investing properly for your daughter’s higher education (which begins in 10-11 years) and your retirement (in 20-22 years’ time).
The best way to do this is to calculate how much you need to invest for each goal and then try to invest it. Your EMI-freed-up money may not be enough for all the goals but that’s fine. Just start investing with whatever you can and then keep on increasing your investments over the years as your income increases.
For long-term goals, you can start investing in equity funds via SIP. If you want to bulk up your retirement corpus, then you can even increase your provident fund contributions via VPF in addition to equity fund SIPs.
I missed adding one important thing: Insurance. If you are underinsured, either on term life insurance or if it is your health insurance, then buy proper insurance as well. Do not delay this any further.
What else should you do?
While most people will think they should save it all, let me deviate and say that enjoy your life too. Once you start saving enough for all goals, don’t try to push yourself too much and save more. Give yourself some (financial) breathing space. You don’t just need to worry about paying/clearing EMIs and investing/not investing. Isn’t it?
If you have a preference for real estate and want to, for a lack of a better word, become a landlord of sorts, then you may not agree with what I have suggested above. But eventually, it’s a personal choice. If you want to take another home loan when the first one is done, then go ahead. But if you don’t want to burden yourself again for years, then give what is suggested above a thought. You will see the merit in doing that.
Dev Ashish is a SEBI-Registered Investment Advisor and Founder (Stable Investor). He provides fee-only financial planning and investment advisory services to small and HNI clients across India.