FINANCE TIP OF THE DAY
Can you afford your loan?!
Know the quantity of loan you can afford. The banks may sanction loan based on your income but you should look at your monthly expenditure and see if you can afford the maximum that banks offer. As a thumb rule, remember not to let your credit exceed 40% of your income!
Home loan EMI and the brown envelope!
As anyone who just moved into their own house will know – it is a wonderful feeling to step into a freshly painted and furnished brand new home! Owning and moving into a new home can be a very fulfilling moment!
Of course most of the brand new home owners will also not forget the flip side of this nice feeling – the first three months and the new strain on finances in the form of the EMI!
Although most people realise that this EMI amount will be taken away from one’s account every month, some can end up making terrible blunders like covering monthly expenses quickly before the bank dips into the account for a big chunk of 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!
An oft repeated grumble in such situations is of course the wish that one should have started saving more!
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 till 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 – What now? You are already in a situation where you paid a minimum down payment and took a considerable amount as loan. How do you move forward?
First thing, acceptance
It is a good thing that you have invested in a house when otherwise you would have spent that money that goes out as EMI anyways in clothes, eating out and entertainment!
The 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. It is an old fashioned but a very effective method of managing the monthly budget.
Ofcourse instead of 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! Also top up your loan account with 1-3 months worth of EMI to help you manage 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. So that you can prepay in small amounts from time to time, helping you close your loan early.
So, here is the secret to handling these loan EMIs:
- Save up a bit before taking the loan i.e. have at least 6 months EMI saved up apart from your regular savings and money set aside for down payment, stamp duty, registration etc. , so that your loan is manageable during interest hikes and also helps you 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.
When you come down to it…it is a no brainer – Borrow, Leave it to the brown envelopes and Enjoy!