Should I prepay home loan or invest in fixed deposit with my extra money?

With most of the house purchases comes the home loan and with the home loan also comes the urgency to repay the loan as early as possible !

Many home buyers assumes that prepaying home loan is the only way to invest their extra money. Often, I have also seen investors taking more rational approach of allocating 50:50% of their amount to both home loan and fixed deposits. Is it right approach? does that apply to me as well ? I say, NOT ALWAYS!

This write-up will help you evaluating the OPTIONS you have got and in a way help you to make right choice with your hard earned money

Home loans (in fact almost every type of loan) have three phases in its overall tenure and each one of that should be dealt in a different way.

Phase 1 where the interest component is more and principal component is less.

Phase 2 has interest and principal amount almost equal.

Phase 3 has interest amount less and principal amount more.

Think about the phase you are in at the moment and give best chance for your extra money to grow.

Phase 1 has lot of interest amount going out of out pocket and to control that, its best idea to start prepaying your home loan during this phase. easy choice indeed.

The Phase 2 is where the interest amount stabilise and is almost equal to principal amount. This is the time when we have equal opportunity between prepaying home loan and investing in fixed deposits. Also, taking home loan duration in to consideration, I always suggest to look at other options apart from fixed deposits like mutual funds, blue chip equity, etc. if the investor is capable to take calculated risks associated with them.

Quite often, there are income tax benefits associated with the home loan and they work in favour of the buyers. It is not favourable to prepay the home loan in this phase but to look at other investment avenues to get better return on investment. Also, don’t forget the added investment experience that goes long way in making you a better investor.

As you may guess, it is never good idea to prepay the home loan in the last phase. This is the time to enjoy the benefits of inflation and income tax rebate. Considering benefits, the interest amount you pay in this phase becomes negligible. Hence, it is advisable to look for other invest avenues for your extra money.

As an exception case, investor might want to pre-pay the home loan if it is almost certain that he / she will be able to complete the loan within 2-3 years.

To conclude, your critical decision depends on where are are on the overall home loan tenure.

Rule no 1 Don’t lose money. Rule no 2. Don’t forget Rule no 1.

Mr. Warren Buffet

I request you to please share your experiences and suggestions to make the article complete !

Happy Investing...

How many eggs and nests should you have…!

“Never put all your eggs in one basket” – Anonymous

In simplest terms, the above adage says that a person should not put all their resources only at one place. I definitely agree with this one but that is just one end of the equation. How about defining how many eggs / nests do we need specifically for our financial aspirations based on our financial conditions?

Most of the people understands “eggs” as “money” in investment world but I would consider it as resources. Your time is also an egg and actually has more value than money – remember our parents saying – “time is money!” Most of us spend most of productive time at work. One should realize that they are putting all the productive time that they have in to only one basket – work. This will benefit to get great recognition, awards and few more income but still, it’s just one basket. Now, coming to the point, we should create many productive avenues to spend time after (or before) work. It is always good idea to improve on skills that you know fairly well and be proficient to get monetary benefit out of it. Soft skills like People  management, sales, marketing and advertising etc. are also very crucial in this process. Real-estate investing, stock-market investing, selling merchandise online and blogging are some of my favorites.

Now coming to the money-eggs, we have ample options to invest around us varying from Fixed-income avenues (like FDs,SDs, Bonds etc) to more un-certain avenues (like Mutual funds and stock-markets). We need to identify our specific need that we want our investment to fulfill. E.g shelter is need and house is an investment. A working professional might need an additional alternate income and may look at real-estate, stock-market as options. We should also learn how the investment vehicles works by “investing enough time” on it before starting to invest money. This process will make you more confident about investing instead of relying on agents and brokers.

The idea is to start with one need at a time and fulfill it with the most appropriate investment vehicle. Keep identifying and fulfilling your needs by learning more and more investment vehicles and you will start appreciating the value of the effort you spent during this process. For most of the people, 3 to 7 investment avenues (and vehicles) are sufficient for their entire life time. If we try to make it more complicated than this, there is high chance of we losing track of what we originally wanted and how the investments are providing!

If you have any issue / concern with the content of this bloc, you can reach out to me shah.ravir@gmail.com

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Many thanks for reading. Happy Investing !

Thought for food

Me (to my friend): Where do you invest to cater to your basic needs?

My friend: well, I don’t. Instead, I work for a company and they pay me for that.

Me: So, what about your time? Isn’t that an investment to your work place and in return you get paid?

My friend: If I don’t work, I will waste my time. (More confidently) At least, I am using my time positively and getting paid. If feels sooo goooood (smiling at me).

Most of the people in this world work for an organization or the government and they pay people for living. If the organization shuts down because of recession / bankruptcy, or government halts working due to political disputes, etc. (now you won’t deny this because you know what happened to America recently!), we all know what happens… insecurity, more and more jobless people, more financial strain, negative environment all around. In all this mess during recession, a person only cares about the salary that he/she is no more earning but completely ignores his/her skills that are developed while working for the organization/government.

A job is really a short-term solution to a long-term problem. – #Robert Kiyosaki

We should invest out time and effort at job for only two things in this order.

1.       Learn Skill.

2.       Earn money short-term.

When you learn a skill, you improve on it on the job (may be after the job) to make sure that works for you. For example, an accountant learns accounting and improves upon its fundamentals on the job. Also, he/she finds out that the accounting is interesting subject and will surely keep him/her happy if pursued for the life time. However, the individual should always keep in mind that his/her accounting skills are helping more to the organization. In long run, the accountant may start his own practice of accounting to make sure he is direct beneficiary of his skills.

To conclude, a person should INVEST time (the most precious entity in the world) and focus on skills development to make sure his/her basic needs are provided. 

Learn more and more skills and utilize them for your benefit and recession, government disputes, bankruptcies will not be able to touch your financial freedom forever!

Tell me what you think about the idea of focusing more on skills development than your SALARY. Do you think its going to change something in your life ?

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Post your comments. I would love to here back from my readers.

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Many thanks for reading. Happy Investing !

Investing made very very simple...

In today’s complex and competitive financial world, a common man struggles to identify the right investment tool to achieve their personal and financial goals. Plethora of deductions like income tax, health insurances, EPF, multiple advice from different people of different backgrounds make it even more confusing for one to even get in to this game. This eventually makes Fixed Deposits (FD) the most favorable destination for investors so that they do not have to deal with the commission-hungry insurance agents, useless bank agents and adamant tax agents.

Frequent news about inflation eating up the profits of FDs leaves an investor thinking what should be done with the existing money as well as the future savings income. Few investors go back to the “different people of different backgrounds” to get new ideas about how should they react and most of them wait and watch their way to economic nosedive. The commission-hungry insurance agents show new unit linked plan and the investor buys in looking at the carrots like life cover, “assured’ income or return, amazing tax saving opportunity, etc. The commission-hungry mutual fund agent does the same and wins their share of commission. Sooner or later, the common man’s all savings income goes in to the hands of equity market (commonly known as share market). The “agent” takes common man to a nasty roller coaster ride where nobody (actually everybody in this world) is a driver!

I have seen many people struggling to fulfill their personal goals due to this rat race. Most of them complaining about one of the agent, bank, market or the government!

If you buy something that you don't need, soon you will have to sell things that you need! -- Mr. Warren BUffet

I generally start discussion with such clients with one simple question -- Do we take only one medicine for all the medical problems?

You get the idea?

The investment world becomes simpler as soon as you understand your needs (like your sickness) and the investment vehicle (like medicine). Most of the times, you know what medicine is going to help you if you have cold and fever.

In the investment world as well, one should first understand personal needs. Here are most common needs to start with.

·         Food and day-to-day needs

·         Home

·         Child’s education

·         Security

·         Well-being of the family in case the income-generating member is no more.

·         Health management

·         Post retirement income

As all the needs are very specific in nature, they are surely going to need that specific investment highly specialized for the same. I call this concept “need-specific investment”. If one start clubbing the investments for more than one need, he/she has higher probability of paying for something that is not going to be useful. How is the deal of free comb with a bath-soap for a bald guy?

I will start expanding needs and need specific investment tools in my next week’s blog. So, keep an eye on my future blogs…

In the meantime, please let me know your needs and the investment tools that you may have used for the same. Also, let me know if you are struggling to find an investment tool for your specific need. I will try my best to address them.