If you haven’t gone through Episodes 1 to 10 of Money Z’s then before proceeding any further, you have to do that first.
Now that you have a basic structure in place for your money life, it’s time to focus on what we left out. The leftovers are just as important as the main text, some may say that they are even more important than the main text as they form the basis of rational money behaviour.
This is more about moulding your mindset to get your money choices right. A lot of our money decisions are emotional in nature and we fear that if some of these decisions are not taken then our path to wealth creation or even happiness will get altered. But there is no one path to happiness, as lifestyles and needs change with changing times so must out money priorities.
Don’t rush to buy that house
In our parents and grandparent’s generation there was an in-built desire to focus on residential property as the first major asset. This is understandable given that a majority of the people at the time focused on getting work in the town or city that they were born and brought up in.
It’s no longer the same association. Many of us travel to cities to find lucrative careers, leaving behind our home towns. Owning a house in the city is not the same as owing one in a smaller town. While for our parents living close to work was a possibility for many of us buying a house in the city – whether working in India or abroad – means moving away from where we work into the suburbs to live.
This in turn means increased travel time and time away from family. Not just that, the norm these days is to buy property on loan. That too a 90% loan against the value of the house. You have to understand that if you are taking a 90% loan on the value, then you really can’t afford it.
While there will be a feeling of gratification for sometime as you feel the privilege of being a home owner, gradually you will realise that repaying a large EMI ties you down to a job, a place and a life that you simply can’t change even if you want to.
Professionally, you will be unable to maximise opportunity in uncertainty because of the EMI sword around your neck. Two things can happen, you will either chase the job that pays you most and end up under delivering because its not the work of your choice or you may have to work too hard to get that extra leg up. Either way you may be pushing yourself towards greater stress and frustration all because of rushing into buying that house too early in life.
Rentals are a good option to begin with
Instead look for options in the rental space. It will not only help you live closer to work because rentals for the same apartment will be way lower than the EMI you pay.
The money you are able to save can be put towards long term financial securities to create wealth.
In our parent’s generation, rentals were scare and access to financial securities was limited to bank deposits and some ponzi schemes. This has changed now and you can easily access equity investments for long term wealth creation, thus, lowering the need to invest in physical assets to build that safety net.
Look for these conditions to be fulfilled if you’re buying
Start thinking about buying your own house when you can afford to do so with a loan value of 40%-50% of the property value and an EMI of roughly 20%-30% of your monthly income.
In this way, you will not have a very large loan and the EMI proportion will comfortably fit into your monthly salary, thus, leaving enough for your other financial and lifestyle goals. Loading yourself up with a heavy EMI that covers more than 50% of your monthly income is setting yourself up for many years of struggle. This is avoidable at least in the early years and start thinking about your housing loan, once you have enough accumulated savings.
Don’t take a loan
Most of us begin our loan journey with a car or a bike loan. There are so many attractive cars on display these days that it’s easy to get carried away. However, just because the EMI fits in your monthly salary, doesn’t mean that you can afford it.
Don’t make your car or bike loan EMI more than 5%-7% of your monthly income. Save space for other aspects of your lifestyle too.
It’s tempting to say the least when you know that an interest free EMI is all that’s standing between you and that latest iPhone.
Everyone can afford an interest free EMI. It usually begins with a small purchase, a small gadget and then a bigger one and many others. Slowly that credit card outstanding goes on increasing thank to interest free EMIs which you can’t afford.
If there is a delay or for some reason you are unable to clear the dues on your card for a month, you will be charged interest at the rate of 36% per annum, that’s roughly 3% interest a month. No longer interest free.
Your inability to repay your loan installment on time will affect your credit rating negatively. This in turn will make any loans in the future more expensive for your as lenders increase the potential interest rate applicable to individuals with a low credit rating.
Don’t get a loan and it will save you a lot of trouble, especially for things which you will use and throw eventually.
With this we come to an end of the Money Zs series outlining all your money issues from planning to saving to insurance to An investment is made to give you a return. You make an investment if you use your money to buy either physical assets like property or financial assets like bonds and equity with an aim to receive income or gains... and loans. This is just the beginning of your money life and if you get the start right then you will be that much better prepared for years to come. Don’t hold back and commit now to doing it right and doing it smart!!
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