The intelligent acquire assets. Common people with ordinary intellect acquire liabilities that they think are assets. This is because different people view financial independence differently. This is evident in some people buying a house early in their lives while some plan a budget that includes earning from their investments and then using the dividends and bonuses to make part payments of their houses. The first one ensures a quick roof on their heads at the cost of a loan or liability; the second one ensures enough earnings to invest and then further savings to live on.
It is okay if your family has been living in rented accommodation for years and buying a house has become imperative for you. The joy of shifting to your abode with your loved ones and securing them under the same roof is inexplicable. However, the burden of a home loan sometimes lessens the happiness of shifting to your place.
Take, for example, another situation wherein buying a house would be just investing in another asset or another way for an investor to park money in real estate. However, is buying a house early in life worth the investment that one makes? To become financially independent is a wish that most people have, but how many know or follow the right way to financial freedom.
Why resist buying a house early in life?
The Western concept of Financially Independent Retire Early (FIRE) has caught on with many people in India, especially, the younger generation that is continually racing against time to grow rich in a short period. However, does buying a house early in life help investors add to their investment portfolios or does it impede their financial goals?
You may have myriad reasons for buying a house early in life, but how do you justify the reason for incurring a debt (aka home loan) early in life? While the current home loan rates may seem attractive, the loan amount will still eat up a major part of your salary that may not be much during the early years of your job. Those inclined to repay their loan early try to maximize their interest and principal outgo with every instalment, thus, leaving very little scope for savings and investments. The decision to opt for a prolonged loan tenure to benefit from low equated monthly instalments (EMIs) translates to more interest outgo in the long run.
Owning a house early in life begets respect undoubtedly. However, this decision can destroy one’s dream of being financially secure in the long run. Money attracts money. The compounding effect on investments holds for debt too. Investment is the key to growth; debt takes away the succour that money provides.
Understanding debt to be free from it
Do not relegate “debt” to a four-letter word alone. Understand its repercussions on your finances, if not handled carefully. To understand how debt works, let us understand its effect in monetary terms. This will help you understand how much you stand to lose or gain in the long run.
Example 1: Let us assume that you are 28 years old and have taken a home loan of ₹25 lakh at 6.70 per cent interest.
At this interest rate, the monthly equated monthly instalment that you would have to pay is ₹18,935.
The total interest payable on ₹25 lakh principal would be ₹20,44,367. This means that the total amount payable would be ₹45,44,367.
Example 2: Let us assume that you are 28 years old and decide to invest a part of your income, equal to ₹20,000 every month, in market-linked instruments. We are assuming that you realize the importance of compounding over a period and hence would continue to invest for the next 20 years. Considering the current volatility in the market and the effect of inflation that has forced the market to assume a bearish form frequently, let us assume the returns on our investments to be roughly around 11 per cent.
A monthly investment of ₹20,000 done uninterruptedly for 20 years can earn you returns at an average interest rate of 11 per cent. The amount invested is equal to ₹48,00,000. The estimated returns would be to the tune of ₹1,26,71,461. The total value of your investment would then be equal to ₹1,74,71,461.
The first situation burdens you with a home loan, thus, leaving you with little to save or invest. The second option turns you into a disciplined investor. You save and invest the money to earn returns. With time, you get bonuses and benefit from a rise in income, which you can invest further or use that amount to repay your loan. The second option also helps you to make the down payment of your loan amount.