Why you should not buy a house to live

Financial Independence, Uncategorized

For most Indians having a house is the first investment that they ever make.  Even the government gives subsidies for taking your first house.  The first house is an emotional issue for most middle class Indians.

After getting a job an Indian male is expected to work for the next 2 to 3 years and then get married. After marriage husband and wife want that they have a house of their own as their first investment where they can live on their own.

So after the person has started working and for 3 years has saved something he gets married spends his savings immediately for expenditures after marriage. Then he starts saving for a house and takes a loan to buy his first house.

Now the company giving the loan is more than happy to give him a longer duration loan because they also realise that compounding helps them make more money.

While paying for the instalments the husband and wife end up completely blocking their liquidity for the next few years.

As time passes you have the family growing and the investments never happen.
Suddenly at the age of 45-50 the couple realise that they will retire in the next 10-15 years. Life has just passed them by.

I did the same thing incidentally, so I know what this couple goes through.

The house I bought by investing Rs 200000 and taking a loan for the remaining 1900000, costed me over the next 15 years a total of rupees 3700000/- and the hardships that we had to undergo because of not having spare cash.

If I take out the benefit of tax that the government of India gives, I ended up paying a total of rupees 3300000/-. Today the value of the house is about Rs6000000/- so net gain of Rs2700000/-.

If I had invested the same monthly instalments in equity over the next 15 years (less the rent I was paying and less the tax benefit I got) I would still have invested every year about Rs150000/-.

The 200000 plus the 150000/- every year for the next 15 years in the conservative NIFTY index would have resulted in me getting approximately Rs100,00,000/-. At this point I could have bought the same house on cash and still have 4000000/- to spare or I could have bought a much bigger flat.

Now there is always this issue about staying in a rented house versus buying your own house… If you can manage to stay up in a rented house for a longer time and if the rent is controlled then you can hold back the fixed cash flow that you will have to shell out when you take a loan for your house. The rent also gets the income tax benefit.

Some of you may come back to me saying – the house also appreciates…. That’s true but the appreciation of any property even in a place like Bombay has not been more than 10 to 12% compounded over the last 35-40 years…. An investment at 15% will beat the appreciation of the property anyway… The second and more important point is, if the house is where you are going to stay then its appreciation has no significance because you will not sell the house in which you are staying and live somewhere else.

Now my intention of the headline is not to stop people from buying a house in which they should live… but the appreciation of the house and the interest rate that the loan company charges actually kill the capability of the couple to ever create wealth.
You should buy the house where you take a loan such that the interest payments get both the husband and wife a tax benefit and therefore the cash outflow is low. You should first invest and create a corpus which appreciates more than the value of property and from that corpus take out enough money and do a down payment so that the interest outflow is just enough for qualifying for a tax rebate.

Till next time….

Retire at 36 ….part 2


When we are young and you ask me to save 60% then what are we earning for….if we cant enjoy when we are young, when do we enjoy.

Instant gratification is a the bane of becoming wealthy.  If you read The SNOWBALL-the biography of Warren Buffet, among the richest men in the world, you will realise the benefits of delaying gratification.

There are 3 other ways of looking at the same discussion which I put out in part 1.

Suppose you were to target a corpus of Rs3crore (30 million) at the age of 36 and today you are at 21.

An alternate to the 60% of Rs500000/- could be that you take your initial job at Rs10,00,000 and invest Rs400000/- in the first year and increase the investments every year by 5%  for the next 15 years.

Or you could take a job at Rs500000/-, in the first year save only 40% but in the subsequent years increase the investments every year by 20% instead of 10%.

The last option is to not take up a job at all. Become an entrepreneur. An entrepreneur has the potential to grow earnings geometrically.  The reinvestment in your own business can grow more powerfully than investing anywhere else.

At the end of the day the idea is to do what you love and love what you do….for that invest early so your nest egg can grow faster and then you can enjoy life forever.

Till next time…Placeholder Image

Retire by age 36…


After my last post some people mentioned why I don’t lay emphasis on asset allocation.  I am not a financial planner so I wont be able to comment on that.

This blog was started so that people, who are my son’s age, learn the basics of money and how to make money work for them.  Unfortunately our education system doesn’t teach this.

The idea of financial freedom is the ability to choose what you want to do in life, rather than money dictating what you “have” to do.

With that in mind there is no doubt that equity has been the biggest compounder over the last 30 years in India.  Even if you just invested in the BSE Sensex alone you would have compounded about 15% over the last 30 years.  If you remember the maths from my earlier blog…that would mean that 6 periods of 5 years.  By the rule of 72, every 5 years the money doubles.  So in 30 years 10000 invested becomes 640000/-

My advice to my son and others his age (in the early 20s) is very simple.  If you can invest about 60% of your income, only in equity over the next 10 years…you can be financially free to do what you want after the age of 36..  The type of equity that you choose can vary.

Assume you are 21 years of age and earn Rs 500000/- per annum and every year get an increment of 10%….you invest 60% of your income – i.e Rs300000/- per annum.  If you invest and get 15% return then every 5 years this amount doubles…by the age of 36 this amount will become 24,00,000/-.

For the next year you could save 330000/- by the age of 36 this amount will be close to Rs23,30,0000/- . The next year’s number will be Rs22,00,000/-.  At the end of the 15 years, you will have more than Rs 30000000/-.  (Rs30 million!!) as your asset base.

This does not mean you won’t work after the age of 36….but when you have this kind of an asset base, you will do the work that you love.

Asset allocation for these young people can be thought of later.  The India growth story has along runway in my opinion.  At this young age I would not like them to play defensive because even small interest rate differences, can make a huge difference in their wealth.

If you are interested there are blogs by J L Collins and Money Moustache which I have found very interesting.  While they talk with respect to the US market the underlying concepts remain the same.

You can retire by age 36 and do what you love.

Carpe Diem!!!