MANAGEMENT OF PERSONAL FINANCE PART 2



The best investment on earth is earth-Louis Gluckman,real estate investor




Introduction:Purchasing a house 

Purchasing a house is probably the largest investment in lifetime for a middle class family. It is seen that middle class families invest 80% of their lifetime wealth in buying property. In contrast the lower income groups cannot do so and keep their wealth in bank accounts. Again the rich keep 80% of their savings in stocks and bonds.

Purchase versus renting

  The first decision before purchasing is whether to stay in a rented house or shift to a home after purchasing it.There are advantages in staying in a rented house. These include living in a neighbourhood near the office ,which frequently is a business district. Purchasing a house in the locality may be too expensive. However renting may be affordable  and allow easy commutation to the office which will be nearby. For example suppose a person stays near his office in prime location and gives a rent of Rs 50000 per month. If he wants to stay there after purchasing a house it may cost him 1.5crore. Suppose he makes downpayment of Rs 30lakhs and takes home loan of 1.2 crores at 8% interest . His monthly EMI now comes to 1.04 lakhs much more than the rent he was paying. He pays 2 .4 cr to the bank as EMI for 20years.However he saves a lot from prepaying the loan in monthly instalments. Otherwise a loan of 1.2cr would cost him 5.5crores after 20 years at 8% monthly interest

   However there are tax benefits in taking a home loan and these gains  need to be reduced from monthly EMI being paid. Thus the interest to the home loan  can be deducted from the total income tax being paid by the individual. Typically the home loan EMI contains high interest component in earlier years  of repayment.  Conversely the rent can also secure tax deductions if the individual gets house rent allowance.

Over a long period of say twenty years it is more beneficial to buy a house . When we buy a house we gain wealth. Though this wealth may give a rental income of only 4%per year ,which is much less than returns from other investments there is escalation in price of the house . While taking a house on rent one pays less every month compared to a EMI. This is a source of vicarious saving and can be invested in stocks to get a 10%return.

Time of purchase

  Time of purchase is crucial in buying a home. Buying early in career would burden your salary with a heavy EMI every month and one cannot save for other requirements as pension and children education. One can wait till 40years of age when salary escalates to say 4lakhs per month. By this time one can save a corpus of 40% of the cost of dwelling and pay as down payment. This will reduce the monthly EMI to be paid. The increased salary can moreover afford the increased EMI.

  For our example at 5% inflation the same house of 1.5 cr would cost after 10years ,at age 40 as 2.4crores.If one can save 1.2 cr during these 10 years and make a down payment of 50% then his EMI of Rs 1.04laks per month is affordable now.


Alternatively one can buy a cheaper


house in the outskirts at 40years of age at even lower EMI.and home loan. After 10years ,say age 50 years the house can be sold at a higher value with a capital gain. The money can be kept in a capital gains account . If he purchases a dream house with a small home loan adding  to the  money kept in capital gains account within 2years one does not have to pay capital gains tax.

Ack:CHAT GPT,GOOGLE

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