Ashish is single and lives with his parents. He has never done any financial planning or saved much, except for the mandatory annual savings through Provident Fund and tax-saving investments. He has indulged in spending bouts, running up huge outstanding bills on his credit cards, but is slowly coming out of it. His parents feel that Ashish will use his income better if he makes a long-term investment, such as the purchase of a house. He is also considering a change of job. Ashish would like to know if it is the right approach to initiate a long-term savings plan by considering a large investment like a house purchase.
Click here for FY 2023-24 tax-saving guideAshish’s decision to buy his first house should be based on his need for it and readiness to service a large financial commitment. He should not consider it from an investment perspective. Since he lives with his parents, there is no immediate need as there will be no saving on rent. It will not add to his financial well-being at this stage. Buying for his future needs implies making many assumptions about the future, all of which may not hold true. Liquidating this purchase later to buy a more suitable house has many procedural and tax issues. Therefore, it is best for him to buy a house when he can evaluate his needs.Ashish may also not be in a position to make the down payment for the house given his lax saving habits. He may be forced to take a high-cost loan that strains his income further. His poor debt habit will also mean a poor credit score and this will translate into a higher cost for the loan.
Ashish needs to do some groundwork before he considers buying a house. He must build a good credit profile with timely payments and low credit usage. It will take him a few years to erase the poor record and build a good one. This is essential for him to get his home loan on better terms in the future. Next, he must set up a goal to build a corpus for his down payment, and work towards it. This will give him a fair idea about when he will be ready to buy a house.
Ashish is currently not ready for real estate as an investment. At this stage, his investment should be flexible, considering the uncertainty of his job and income. It should be income-oriented so that it can be used to support his income. As his income stabilises, he can consider long-term, growth-oriented investments, but ones that are flexible. Real estate, as investment, will be suitable at a stage when his income and cash flow are not a constraint for his financial situation.
Content on this page is courtesy Centre for Investment Education and Learning (CIEL).
Contributions by Girija Gadre, Arti Bhargava and Labdhi Mehta.
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