Bigger House, Higher Net worth — and still why can’t I achieve my goals
Who Doesn't Want To Buy Their Dream House and Live in it throughout their Life
With rising income and easy availability of housing loans, the temptation to buy that big, luxurious dream house at a young age, is top priority.
Many, high income young couples, opt to buy expensive, homes at a young age and justify that their future income will provide for other primary goals like retirement, child’s education.
This is the biggest problem for young couples not achieving their Primary Goals.
Wanting to own that Dream House is alright,but definitely not at the cost of your child’s future education or your own retirement!
Let us understand this, with an example.
Ramesh and Suresh are 30 years old with a one year old child. They both earn Rs.12,00,000 pa.
Their respective spouses are also working and their income is Rs.800000 pabringing their total income to Rs.2000000 pa.
They both have similar goals like house purchase, child’s education and retirement. They both had existing saving of Rs.1200000 and their annual expense is Rs.6,00,000.
Ramesh decided to buy a house for Rs.1,00,00,000 and Suresh bought a house worthRs.50,00,000and moved into it.
Since Ramesh’s house was bigger and luxurious, the annual maintenance cost of the house is Rs.50000 pa.
Suresh was able to get 80% of the house value as loan. He got a loan for Rs. 40,00,000 and made a down payment of Rs.10,00,000 from his savings.
Ramesh was able to get a loan for Rs. 80,00,000amounting to 80% of the house value. He liquidated his entire savings of Rs.12,00,0000 and borrowed 8,00,000 from family additionally to make the down payment.
Let us view the table below:
| Ramesh | Suresh | ||
| A | Cost of house | Rs.1,00,00,000 | Rs.50,00,000 |
| B | Down payment | Rs.20,00,000 | Rs.10,00,000 |
| C | Loan Amount | Rs.80,00,000 | Rs.40,00,000 |
| D | Interest Rate | 10.40% | 10.40% |
| E | Monthly EMI | Rs.79,334 | Rs.39,667 |
| F | Annual EMI | Rs.9,52,008 | Rs.4,76,004 |
| G | Annual Income | Rs.20,00,000 | Rs.20,00,000 |
| H | Annual expenses | Rs.6,50,000 | Rs.6,00,000 |
| I | Investible surplus per annum(G-(F+H)) | Rs.3,97,992 | Rs.9,23,996 |
| J | Remaining investments/Savings after down payment | Nil | Rs.2,00,000 |
| K | Other Loans | Rs.8,00,000 (interest free from family) | Nil |
Both of them, have similar financial goals. They want to save for their child’s graduation and want to retire at 60 years.
They want to cover their expenses for 20 years of their retired life, assuming a life expectancy of 80 years.
Let us assume both of them decide to invest the entire surplus amount.
At an inflation of 8% and Return on investment of 9.5% from the investments, let us see how well they fare in meeting their goals.
| Ramesh | Suresh | ||
| For Child Education – 17 years from now | |||
| A | Current value of Child education | Rs.20,00,000 | Rs.20,00,000 |
| B | Future value (after 17 years)@ 8% average inflation rate | Rs.74,00,000 | Rs.74,00,000 |
| C | Monthly investment required to meet child education goal | Rs.14,545 | Rs.14,545 |
| For Retirement – 30 years from now | |||
| D | Projected Annual expenses at retirement @ 8% average | Rs.65,40,727 | Rs.60,37,594 |
| E | Retirement Corpus needed to sustain 20 years of retired life (60-80 years) | Rs.11,51,11,937 | Rs.10,62,57,173 |
| F | Monthly investments required for retirement goal | Rs.56,176 | Rs.51,855 |
| G | Total monthly investment required for both the goals per month(C+F) | Rs.70,721 | Rs.66,400 |
| H | Total investment required per annum | Rs.8,48,652 | Rs.7,96,797 |
| I | Annual Income | Rs.20,00,000 | Rs.20,00,000 |
| J | Current Annual Surplus(from Row I in table 1) | Rs.3,97,992 | Rs.9,23,996 |
| K | Gap/Surplus(J-H) | -Rs.4,50,660 | Rs.1,27,199 |
| L | Goal Met | NO | YES |
From the above table, we can conclude, that Ramesh needs to invest Rs.8,48,652 per annum to meet his goals of child education and retirement.
But his investible surplus after essential expenses and EMIs is only Rs.3,97,992 whichleads to a big gap of Rs.(-4,50,660)
Therefore, his Primary Goal of funding his child’s education and funding his own retirement is left un-attended.
He also has an additional liability of Rs.8,00,000( loan borrowed from family members) that needs to be repaid..
On the other hand, Suresh needs to invest Rs.7,96,797pa and will be able to meet his goals.He will also have an additional surplus of Rs.1,27,199 which if invested, would build a corpus to buy a bigger house at a later stage.
If only Ramesh would have postponed his palatial home purchase to a later date, after planning for essential goals, he would have been able to both, meet his Primary Goals and live in his dream home, without having the burden to repay his family members the personal loan.
In conclusion, it is important to plan for Non Negotiable goals like Education for our children and Retirement, first, before being tempted to purchase the high value real estate home.
Akhila Muralidhar
Para Planner
Dilzer Consultants Pvt. Ltd.
14 May, 2015