A spending detox will be required post the festive season. This means locking away credit cards, having no access to shopping apps, staying away from malls.
Mrin Agarwal Financial educator, founder director of Finsafe India Pvt. Ltd & co-founder of Womantra
The festive season is here and this means increased spending and possibly increased loans considering the ease of buying things on buy now pay later and the access to instant personal loans. Even with high interest rates, home buying is at record breaking levels with reports of the highest sale of residential units in the first half of 2023.
Buy or rent? How to manage a home loan at 9 per cent? These are some common questions concerning home loan decisions. The decision to buy or rent is an emotional decision. From a financial perspective, renting would be better. This is because buying a house on a loan means paying almost double the price of the house due to the interest component on the loan. Not to mention other costs like maintenance, repairs etc., which renters do not face. Further, the pace of increase in residential prices has slowed to @ 5-6 per cent p.a. over the last decade. Hence the decision to buy or rent shouldn’t be based on returns but on the desire to own a house. If this gives happiness to the investor, it is ok to forgo objectivity.
While buying a house on loan, two things should be done – make a large down payment of at least 30-40 per cent and keep the EMI limited to 30 per cent of the take home income of the family. This will ensure that the interest paid (which is compounding!) does not overshadow the family finances. Often, individuals do not calculate the long-term impact of loans on their overall wealth but having 50 per cent of income going to EMI can even negate growth on the investment portfolio.
As much as people try, there is no getting away from high expenses in the festive season. Social media fueled peer pressure has induced a lifestyle creep in most people’s lives. Even with steep hike in airfares and hotels, there is no stopping Indian travelers. Car sales are at a record high especially in the higher priced SUV segment. The next four months will be high expenditure months and individuals need to prepare for the expenses over relying on their credit card or loans.
It is recommended to limit overall expenses excluding EMIs to 30 per cent of take-home family income and within this have a fun expenses budget. These budgets will go awry in the festive season. Hence it is important to first check if the current expenses are within the 30 per cent limit and secondly earmark the amounts that are estimated to be spent in the coming months. A spending detox will be required post the festive season. This means locking away credit cards, having no access to shopping apps, staying away from malls. The idea is to get the savings level back to what it should be and also to increase investments, in case earlier investments were redeemed to pay for a large expense. Of course, unsecured loans like personal loans, insta loans are best avoided as they are expensive and have a negative impact on the credit score of an individual.
Enjoy a guilt free festive season with some planning.