Buying a home is one of the biggest financial decisions you will ever make. This decision will make you relook at your finances, cut your monthly expenses, forego your next Europe trip or even your desire to buy the next smart phone. Because nearly 40%of your take home salary will be committed for the longest financial obligation of your life!
Let us understand home loans a little better.
Home loan value: Rs. 20 lakhs
Loan period: 20 years
Interest rate: 8.65%
Monthly EMI: Rs. 17,547
Total amount paid through EMIs: Rs. 42.11 lakhs
This means that the borrower ends up paying double the amount at the end of the loan period.
If you can afford Rs. 17,547 per month, can you set aside another 10% per month?
You will now wonder, what could 10% of my monthly EMI possibly buy me?
Invest this value in an equity mutual fund for the same period and the results could surprise you.
10% of EMI: Rs. 1750
SIP Period: 20 years
Returns assumed: 14%
Final amount accumulated would be Rs. 23 lakhs!!
The amount is greater than the home loan you actually started with! The power of compounding and the really long period of investment actually made this happen. And for really long tenures like these, the sensex has actually delivered over 14% returns on an average per year.
Putting the best practices recommended by Scripbox into action, had the investor increased his SIP contribution by 10% every year during the tenure of the loan, he would have accumulated Rs. 43.4 lakhs. This is more than the sum of all EMIs paid towards the home loan! It really makes sense to continue investing when you take a home loan.
While this sum may not buy a home in the future, thanks to inflation, you would at least have the satisfaction of having earned back the money you paid.
Wondering how you can start this process for yourself? Check-out Scripbox long term wealth.