Buying a House: A Practical Approach Amid Uncertainty

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Buying a house has long been a cherished goal for many. It provides a sense of security, pride, and a tangible achievement. But when should one buy a house? Some argue that as soon as you start earning, you should aim to buy a home and get “settled.” However, in an ever-changing and uncertain world, this notion may no longer hold. It’s prudent to prioritize long-term goals before settling down and making significant financial commitments like buying a house.

The “Buy vs. Rent” debate often leans towards renting, especially in India, where rental yields can make financial sense. Yet, there’s an emotional pull towards owning a home. Owning property is often viewed as a status symbol, providing instant gratification and a sense of stability. But it’s crucial to look beyond emotions and consider the broader financial picture.

Everyone’s situation is unique. For some, with decent earnings and modest spending habits, buying a home early in their career may seem feasible. However, the challenge arises when decisions are driven by emotions or societal pressures rather than a holistic financial perspective. (Read: How Prepared are you to buy a house?)

Recently, I spoke with an NRI client who moved to Dubai. He considered buying a house because the rental yields were good, and his EMI would be equivalent to his current rent. However, he needed to save 25% of the house’s value as a down payment. While this plan seemed financially sound, it failed to account for uncertainties.

Practical Considerations:

1. Future Mobility: What if you decide to move back to India or another country? Managing property from afar can be challenging and may require hiring a property manager, adding to the costs.
2. Job Stability: What if you lose your job? Unlike investments, where contributions can be paused, EMIs require continuous payments, regardless of your employment situation.
3. Joint Ownership Considerations: If buying jointly with a spouse, both parties’ financial situations and stability must be considered. The loss of one income could impact the ability to service the loan.
4. Opportunity Cost: Borrowing early means you’re betting on future income to invest in later goals, such as children’s education or retirement. Starting to invest early can leverage the power of compounding, potentially reducing the need for significant investments later. (Read: How to safeguard child’s future through financial planning?)
5. Liquidity and Flexibility: Investing in a home ties up a significant portion of your funds in a non-liquid asset. In contrast, investments in mutual funds or stocks provide more flexibility to adjust to changing financial circumstances.

The Decision: Investing Early vs. Borrowing Early

Investing early can lead to substantial benefits from compounding, potentially growing your wealth significantly over time. Delaying a home purchase may result in higher property prices, but it allows for more flexibility in saving for other important life goals. On the other hand, borrowing early to buy a house might seem appealing, but it ties up your future income and may limit your ability to save for other critical goals.

In my experience with hundreds of financial plans, a common challenge is balancing retirement, children’s education, and home purchase goals. Often, the income generated is insufficient to comfortably achieve all three, especially if expenses aren’t kept in check. Retirement planning alone can consume a significant portion of one’s surplus, leaving little room for other aspirations.

Practical Guidance:

I understand it’s not an easy decision. You may be looking for a calculator to understand your situation better. This is where financial planning can help. Start by examining your cash inflows and outflows, as well as your assets and liabilities. Determine how much savings you need to support other goals and prioritize them. Do the math to find out what you’ll have left after accounting for important goals and whether it’s enough to cover EMIs. Remember, the most important goal is often the one that’s far away, not the immediate one.

You may also consider scenario analysis. For instance, if you buy a house now, what will be the impact on your cash flows? How will it affect your ability to build a corpus for other important goals? In both cases, consider best and worst-case scenarios and decide accordingly.

However, also remember that life is not mathematics, and you need to be prepared for unplanned scenarios too. So do keep a Margin of safety and Room for flexibility.

Conclusion

When considering a house purchase, it’s essential to weigh the emotional satisfaction against the practical implications. Future uncertainties and financial goals must be factored into the decision-making process. A well-thought-out plan, considering all aspects of your financial life, can help you make a wise choice that aligns with your long-term objectives. Remember, the key is to prioritize financial stability over societal expectations and emotional gratification.