Own home is a dream for most of us , it is a social status so it becomes social pressure for you and me to own a home and thinking that it is our lifetime goal, so basically we think “home is an asset that everyone must have”. Rented home is always a temporary option in our life. Requiring a lot of calculation whether rented home or home on EMI is better , but here we are not going to discuss that, instead we should be clear that owning a home is an asset or liability.
Before even going into this discussion, what happens if you own your home
- Social status increased
- Feeling more secure
- One of the biggest milestone reached
- Parents will think you are almost settled etc..
But in reality all the above things are reasons why we are in the middle class from generation to generation. If you want to come out from this middle class trap ,first understand your home is not an asset , it is another way of liability. Yes , your own home is a liability .
- Liability – Taking money out of your pocket.
- Asset – Putting money to your pocket.
You can ask me how our home can take money from your pocket. Are you paying EMI for your home ? if yes it is an expense in a personal balance sheet and the other way it is income for the bank, because they are getting interest from you. You can easily argue here that appreciation whatever we will get in future will be more than the interest we are paying during our EMI tenure and not having EMI will make money flow into some other expense stream , so it is better to spend money on an Home loan EMI. Here only we need personal finance knowledge to come out from the debt trap.
EMI – is an asset for the Bank and a liability for the customers, each month the bank will get income from us.
Learning personal finance is a must to attain financial freedom in our life , if we are not attaining financial freedom we need to work till our death. We used to spend half of our income to EMI’s remaining half to our day to day expenses and bills. In this case we won’t save or invest enough money , saving and investing is the most essential part of financial freedom.
1. Saving= Income – Expense.
2. Expense = Income – Saving.
Here “Expense” includes EMI also, because it goes out of our pocket.
Step 1 is followed by most of us , but we should follow Step 2. Because in Step 1 most of our income will go as expenses ,at the end of the month we need to borrow money from someone or need to use our credit card. While following step 2 also at month end the same problem will be there but at least our savings will be protected in same place. This savings is properly invested one can buy home in own money within 5- 10 years without EMI.
Home Loan with 30 years tenure:
|Home Loan Principal||Interest||EMI||Tenure|
To calculate home loan use this link:https://emicalculator.net/
SIP with 30 years of investment of 20k, remaining 20k is for rental expenses.
|SIP||Returns||Years of investment||Maturity Amount|
To calculate sip returns please use this link:https://groww.in/calculators/sip-calculator/
Clearly in the above example around 6.5 crores you will get if we invest it in mutual funds on a monthly basis , here I mentioned 12% as return it may vary between 10-15% if it comes from a mutual fund.With this maturity amount one can buy fully paid home for 2,87,17,456 after 30 years this rate adjusted against inflation(click here for inflation calculator:http://www.easyinsuranceindia.com/inflationindex.do) , mostly residential real estate appreciation also equal to inflation. Remaining corpus will go to assets that anyone can use for their retirement too.
Remember one thing I am not insisting , we should buy a home after 30 years. It is just a comparison to understand the things in the best way. You can easily plan and save money for a home with a 10 years goal along with that,we need to concentrate on building other assets to make passive income streams to your income. But only with home we cannot able to attain financial freedom. During initial days paying a loan is not going to be a painful process but as days pass it will affect our peace of mind even though banks are providing the easy repay option , alongside we need to pay maintenance cost ,registration fees etc..
If you move to your own home there are chances that changing your job location is also a big concern for you, if it is rented home this problem won’t be there. If you are in your early 30’s better to plan home after 10 -15 years so that you can go and shuttle in one place , this is the age we need to look for a good opportunity to increase our income , opportunity won’t be around our home for sure.If it rented home no one will stop us to move from one place to another.
Home without EMI also not an asset
Asset is the thing which will put money in your pocket as discussed. Your home without loan also will take money out of you through maintenance , property tax etc.. So your own home is always a liability for you, if you want to attain financial freedom we should accumulate assets not liability , so here also we fail.
When home is considered an asset?
Answer for this is ,when it will put money to your pocket i.e. rental income. Yes, a rented home is absolutely an asset which will increase your income. Still you rented the home but that is under bank loan EMI. If EMI is less than rent than it is an asset otherwise it is again a liability , in most cases it is not possible to get rent that is equal to EMI. So recommendation is to have fully paid rented home.
Then we should not have our own home?
Surely we can have it , that will give immense pleasure with proper planning. If your source of income from multiple assets mostly from passive income then owning a home is a better idea.
Passive Income streams
- Dividend income
- Patent rights income
- Business income
- Rental income etc..
To attain these income streams we should save and invest our money, but without that passive income if you go home then it will be a big debt trap then we need to spend our whole life income as EMI only. If we go into that trap, saving and investment is not possible at all.
- Own Home with EMI – Liability
- Rental home with EMI – Liability
- Own Home without EMI – Liability
- Fully paid Rental home– Asset