Covet that home? Get your cash flows right

Kaushik was panting and sweating profusely. He had been on the treadmill for 20 minutes, with the incline set at 30 degrees, and had clocked 1 km. He wanted to do one more, but it seemed like his legs would give away. The last thing he wanted right now was more of the arduous trudge, with so much in his mind.

Kaushik and his wife Vidya were very keen on a good residential property and were fortunate to find one they both liked. They debated for months about going for it, for the asking price was rather steep. They could shell out Rs75,000 per month as EMI, nothing more. But, the property cost Rs1 crore, which meant the upfront payment had to be about Rs25 lakh. And they were too sold on this one to be able to reach for some other.

Let us understand the couple’s situation.

Kaushik (36) worked in a software company as a project leader, earning about Rs23 lakh per year. His take-home salary came to Rs1.33 lakh after deductions and taxes.

The couple’s average spend on the household, including house rent and the school fees of their son Arnav was about Rs40,000. They also had a systematic investment plan (SIP) going, for Rs5,000 a month. Then there were annual expenses and insurance related expenses of Rs1.5 lakh, which took the average monthly outgo to about Rs57,500, leaving them a surplus of about Rs75,000.

The calculation did not factor the holiday expenses, which could go from the bonus Kaushik normally got during October. They go on vacation only if he gets a bonus, not otherwise. Hence, they were able to go on vacation in only three out of the past five years. But they had no complaints, for this was a discipline they had imposed on themselves and it felt good to be following it diligently.

Their savings were good, too, at about Rs27.5 lakh — under 20% of this in equity shares and mutual funds and the rest in various instruments including fixed deposits (FDs), National Savings Certificates (NSC), Kisan Vikas Patra (KVP), bonds and Post Office Monthly Income Scheme. Typically, they make an FD of the amount left after expenses every month and sometimes invest in NSC, KVP and bonds, etc. The selection of investments has been fairly ad hoc, but at least they were not blowing it all up. After all, they would need to buy a house at some point.

But now, it looked like they would have to liquidate the entire savings if they were to buy that home.

Had the home been available on a ready possession basis, they could have just moved in and the savings on rent could have been used for EMI. But, that was not to be. The flat would take two years to be ready — Kaushik and Vidya estimate it would take about three years, going by the experience of their

friends — during which they would have to pay both rent and the EMI.

Their landlord, Kaushik’s friend and colleague Aditya, had been quite generous. For the past three years, Kaushik had been paying him Rs12,000 per month as rent. Kaushik wanted to increase the rent but Aditya would have none of it. Even so, once the EMI started, the rent payout couldn’t but hurt.
This had the couple worried when they sought my help.

I told them right off the bat that I was no magician and they should not expect any sleight of hand to make their cash-flows bloom. We then got down to things that had to be done.

First, I found out how urgent their home requirement was. It was urgent, they said. Kaushik said he was 36 and not getting any younger, and they would need to settle down.

Point taken, but what’s the hurry now? I asked. Why couldn’t they wait for a year or two more? After all, they have waited this long. Besides, what if Kaushik were to be transferred to or took up a job in another city?

Kaushik and Vidya exchanged knowing looks. That said it all. They were set on buying a home and have engaged the services of a financial planner to assist them in that. Now, this twerp was trying to tell them that they don’t need to go for it now.

I softened a bit. There are two options, I informed them.

First, go for the home now (I got their attention now). They could do that if they liquidated investments to the extent of Rs20 lakh and stopped the SIP they were doing for Arnav. Plus, if they could get a loan from their friends and relatives for a short period where repayment (with interest) could start after three years, it would be desirable. Vidya’s father had suggested a gift of Rs5 lakh to her. The couple had not accepted it. They could accept it and return later. This way, they would need to liquidate investments up to Rs15 lakh. The other thing is to use the bonus to prepay the loan and get the EMI down, to release some regular cash flow. This, I suggested, they do for a couple of years. The amount of reduction could be put into a good equity fund for Arnav later. So, stopping the SIPs would be just a temporary thing. More SIPs could be started one year down the line. I also suggested they repay their loan of Rs5 lakh once they move into their new home, as that will release cash flows of Rs12,000 per month (rent amount) and the bonus amount can still be used to bring up the balance.

The only issue in this option was that they would not have a proper holiday for the next three years. “So,” I asked, “are you willing to sacrifice your holidays so that you can book your home now or shall I explain the other option where you can postpone this purchase by a couple of years?”

They again smiled at each other. This option was workable, they said. The sunshine was back in their life.

The writer is a certified financial planner who runs Ladder7 Financial Advisories and can be reached at ladder7@gmail.com