Should You Stop Investing
When You Decide To Buy A House?
Question: I understand investing for the long term can be highly
beneficial. However, I am planning to build a house, starting from next few
months for which I am using all my savings and also going for a Home loan. I
will be using my salary to pay home loan EMIs and also to pay off the home loan
as soon as possible.
I think using my future savings to pay off the home loan is
better than investing the same money in mutual funds and waiting for long term
gains. Am I correct?
Answer: Congratulations on starting to build your own home! This is a
big milestone.
We understand that building a home is usually a stretch and most
of our savings do get directed into that. However, you should not put ALL your
savings into that and a fine balancing act is required.
This is because your home is a family asset and not a financial
investment - meaning, that you won't sell it to pay for something else. Whereas
financial investments are something that serve to pay for some future
requirement.
You, therefore, need to have some money set aside for
contingencies and other needs. What would happen if you need money for a
medical emergency or something similar?
So, the best thing to do is to ensure that:
#1. You don't dig into your emergency fund to meet upfront home
costs like down payment. You must always have 6 months take home set aside. Put
this money into an FD or a debt fund.
#2. Every month, you should set aside a minimum 10% of your EMI
into long term financial savings. E.g. if your EMI is Rs. 30,000, save Rs.
3,000 into equity mutual funds.
#3. As your salary increases, you can save the increased amount
every month into a debt fund and once a year take the decision to pre-pay some
of the principal of your home loan, use it for some requirement or invest for
the long term.
This gives you better control over your finances and keeps you
stress free to enjoy your new home.
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