As anyone who just moved into their own house will know,it is a wonderful feeling to step into ones own brand new home.
Of course most new home owners will also not forget the flip side of that feeling: the first three months and the new strain on finances due to the EMI.
Although most people realise that this EMI amount will be taken away from ones account every month,some can end up making terrible blunders like covering monthly expenses quickly before the bank dips into the account for its EMI.
This can lead to a cheque or ECS bounce early in the tenure. To avoid this it is best to understand when salary credit happens and time the EMI withdrawal accordingly.
Most households these days belong to the double income category and when you apply as co-applicants for your home loan,your loan eligibility also increases,helping you gain access to a good loan amount.
However,often the emphasis is more on spending than saving resulting in procuring a higher loan amount than what was planned initially.
It is best to wait until you save a considerable amount as down payment before opting for a home loan.
Saving helps you in two ways you will understand the sacrifices involved in putting aside money and will become used to it and you will have the gratification of borrowing less which means a lesser EMI burden every month,which leaves with the ability to manage your money better.
However,the question arises How do you move forward? You are already in a situation where you paid a minimum down payment and took a considerable amount as loan.
The first principle is,to put simply, acceptance: It is a good step that you have invested in a house when otherwise you would have spent that money that goes out as EMI in clothes,eating out,entertainment and other consumption. Brown envelope technique
Your grand mother probably used this system. You can put small sums into envelopes and label them as vegetables,milk,rickshaw / Bus etc. This requires diligence.
This is an old fashioned but a very effective method of managing the monthly budget.
Of course,instead of grandmas brown envelopes you can use bank accounts,which you can use for your loans and savings.
Additionally the salary accounts of you and your spouse can be utilised for monthly expenses and entertainment respectively.
Be vigilant on tracking and retaining monies in these accounts for their allotted purposes.
This will teach you discipline. In addition,top up your loan account with 1-3 months worth of EMI to help you manage cash flow in case of a sudden emergency.
Divert a portion of your savings account to mutual funds,demat account and recurring deposits.
Remember to route some of your salary bonuses,sudden spikes in profits from the stock investments etc. to your loan account.
This will enable you to make prepayments in small amounts from time to time,helping you close your loan early.
Theres really. no secret
Save up a bit before taking the loan. This means you would need to have at least six months EMI saved up apart from your regular savings and money set aside for down payment,stamp duty,registration and other expenses so that your loan is manageable during interest hikes and also a higher upfront payment means you need to borrow less.
After the loan has been taken,accept it,take it seriously. The loan has to be paid come what may.
Instead of mixing up all spending,saving,investing,loan repayments,charity etc. in one account use the brown envelope technique.
Open a separate bank account that will service loans. Apart from you having control and discipline over loan payments,this account will also come in handy to establish your loan repayment history in case you want to take more loans.
When you liquidate some investments or when you get a bonus or windfall divert part of it to the loan account to be out of your debt much earlier than planned.
The author is CEO,BankBazaar.com