Wondering whether it is time for you to invest in a home? Here are some things you should consider.
I am 26, married and earn Rs 20,000 per month.
I manage to save Rs 5,000 a month, after my rent (Rs 4,500) and other expenses.
I have no savings or investments.
How should I save? Should I go for a home loan? Or must I wait and save for a few more years?
- Shashank Gokhale
I am 25 and married. We recently shifted to Bangalore and started our career. My husband and I each earn around Rs 35,000 per month.
We spend around Rs 18,000 every month on rent and household expenses.
Should we buy a flat now or will the burden of a home loan be too much? Or should we continue to pay rent and put money in a recurring deposit?
- Monika Sharma
Investing
Use your monthly saving to first invest and save some taxes.
To get a list of all the investments that get a tax break under Section 80C, read All about Section 80C.
Choose an Equity Linked Saving Scheme to save tax and get some growth. An ELSS is a diversified equity fund that offers a tax benefit under Section 80C. To understand how an ELSS works, read Which ELSS fund should you invest in?
When choosing among various mutual funds, look for the track record, returns, risk and performance in good and bad markets. Read How to compare mutual funds and How risky is your fund?
A pure term insurance will come very cheap at your age. Go for it. Read Insurance for your 20s.
Open a Public Provident Fund account and invest some money every month.
You can even try investing small amounts every month in a mutual fund. This is known as a Systematic Investment Plan. To understand SIPs in greater detail, read How to invest in a mutual fund.
Revisit your investments
As your income increases and you have a higher saving ratio, you can increase your equity investments.
In five years' time, you will be able to review what you have and make your decisions from a more stable platform.
Rent or buy?
If you and your spouse are happy to stay in a house that is small enough to cost -- in terms of Equated Monthly Installment -- the same amount (plus the tax saving on the EMI) that you now pay as rent, you should go for a house.
You can continue to save, spend comfortably and move into a bigger house, once you have more stability in your finances.
If you both can look at the house you buy as merely a tax and money saving device, rather than any reflection of your status, this should work for you.
The money that is now being paid as rent can become funding for an asset (your home). You can hope to dispose it off at a higher value when you need to buy a bigger house.
Many people who invest in a house tend to overlook the fact that there will be several incidental expenses. You must be in a position to dip into your income for all of these. The home loan financier will not pay the entire cost of the home; they will fund around 80% to 85% of the amount you need to buy a house. You will have to come up with the rest. Also, there are other fees like stamp duty, broker's fee and processing fee.
Get Ahead adds these tips for those contemplating on buying a home.
Renting is convenient when
1. Your job requires you to move from location to location.
2. You are contemplating moving to another city.
3. You do not have money for the downpayment and other expenses, but can afford a security deposit.
4. You don't want the bother of home maintenance and repairs.
5. You can probably stay in a posh locality where you may not be able to afford your own home.
Renting is inconvenient because
1. You get no special tax breaks.
2. You don't stand to gain from the rising value of property.
3. You cannot rework the house to your liking.
Buying is convenient when
1. You are clear on your budget and housing expenditure.
2. You are psychologically ready to take the plunge.
3. You are tired of 'throwing' away money on rent.
4. You have had it with obnoxious, interfering landlords.
5. You want a place to call home on your own terms and conditions.
6. You have saved enough for downpayment and other expenses.
7. You want to take advantage of the tax break on housing loans.
8 .You don't want the hassle of increased rentals every year.
9. You are looking at capital appreciation so you can sell your home at a future date if need be.
Buying is inconvenient because
1. You will have to save enough for the downpayment and other expenses.
2. Moving out and around is not easy anymore.
3. You now have a loan to repay and that means you are financially immobile to that extent.
4. All repairs and maintenance are now your problem.
Uma Shashikant is a well-known Knowledge Management Consultant.
Illustration: Dominic Xavier
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