Investment is one of the best ways of making money. The idea of investing once and reaping the benefits for years does excite you. It excites everyone. You will hardly find anyone who doesn’t want to earn money passively.
Investing is not a walk in a park.
You could easily lose all your invested money. It can also jeopardise the Golden Period of Your Life.
And let me tell you a secret:
The chances of losing your invested money is more than earning from it.
In this article, I would like to bring your attention to the wrong mindset of investing money. This will help you understand the loopholes and make way around it.
An Investment mistake that people make early in their career is to take a decision of buying a house.
If you could even slightly connect with me then this article is for you.
When you invest your money into buying a house, you are buying a liability, you are putting bucks in the liability section.
Well, let’s see some real world numbers.
Table of Contents
Early Investment Mistake
Suppose you are a 21-year-old fresher who has just got a job.
Let’s assume you earn somewhere in between 3-4 lakh per annum which roughly estimates to somewhere between 20,000 INR to 25,000 INR every month (deducting PF and mediclaims).
You work for 5 years with a 10-15% increment every year and save approximately 15 lakhs.
Now, you plan to buy a house which is going to worth around 65 lakhs.
You will pay 14% of the total worth that comes out to approximately 9,75,000 (nine lakhs seventy-five thousand).
The principal amount now comes down to 55,25,000 (55 lakhs twenty-five thousand). The interest rate for home loans are close to 8.5% (taking minimum interest %) for 30 years (max duration) tenure will approx to 42,482 INR (42 thousand four hundred and eighty-two).
This could be more than 50% of your salary.
I used Home loan EMI calculator to calculate the above stats. You can refer the image below,
Okay, now I want you to open your mind and try it yourself.
Navigate to the following link – EMI CALCULATOR.
Now pay close attention to what I’m about to say here.
You will have to set the amount, tenure period and rate of interest into the form by dragging the slider on that EMI Calculator.
- Set Loan amount to 30 Lakhs (30,00,000 INR)
- Tenure period to 25 years (an average)
- And, minimum interest rate according to current market as 10.5%
It is time for a realization. Take a look at the below snapshot,
Let me summarize the stats for you. Find it below,
- Total Loan Amount: 30 Lakhs (30,00,000 INR)
- Total Monthly EMI: 28,235 INR
- Tenure Period: 25 years
- Total Interest Payable: 55 Lakhs approx. (54,97, 635 INR)
- Total Payment (Principal + Interest): 85 Lakhs approx. (84,97,635 INR)
You see the game here.
You have paid more interest than your actual loan amount.
There is a lot of calculation goes into calculating this amount. This is the reason people often find themselves trapped and they cannot do much because they opted for this trap happily (unknowingly).
These companies are taking a toll on your income and they are there to suck you for the rest of your life.
If not your entire life but The golden period of your life will be consumed by filling their pockets. They have not done a thing to earn the amount that you are paying them. They just gave you the money to buy a house. That is all they did and now they are sitting there to eat your hard-earned income.
Wow! what an amazing world 😀
Am I Being Unfair
I got a critic after posting this blog post.
Many people complained to me that they are not going to pay the loan for 30 years. As their salary increments, they would reduce the loan tenure.
They would increase their EMI amount by 5% annually. Definitely, it is a smart move in your head but did you practically calculated it by yourself.
Let’s do it here:
Further break down annually:
5% of 26K is 1.3K
Add 1.5 to next year’s annual repayment. It would become 50K.
5% of 50K is 2.5K. It would become 55K in the third year.
5% of 55K is 2.75K. It would become 59K in the fourth year.
This calculation will save you (say 5 years) at the end.
So you started at the age of 27. After 25 years you are 52 🙁
Now let’s assume the best case scenario and you get married after 3 years and find a working partner then tenure period might come down to 15 years.
Quickly add 15 + 26 and you will get your present age e.g. 41.
Oops, it’s 41 already.
I’ve excluded the liability of kids and children and their education into the equation (which are inevitable after marriage).
What did you have after spending the golden period of your life?
Yes, a two bedroom apartment. YEahhhh!
This happened just because of one bad decision you took very early in your life. You invested in for your liability whereas you should have invested in making assets.
So, what is the better solution?
The Better Investment Decision You Can Take
You know the adverse effects of bad investment.
How an investment made on liabilities can significantly change the entire course of your life.
How it can take The Golden period of your life away from you.
You might ask – “if I don’t buy a house then what have I done in my life, At Least I should have my own house”.
If this is your concern then you need to think again. Will you really become content after paying interest for 30 years just to claim your new home?
- The Best Investment of Your Money and Time
- Invest In Yourself
- You are Losing Money if You Do Not Plan Your Monthly Expenses in Advance
A Better Approach
I have a different and better approach. This approach will help you to make Assets.
Assets that put money in your pockets rather than taking it out.
Assets that can fulfil all your desires.
Just put yourself in the same situation once again.
You are a guy who has got a job with an annual pay of 3 lakh rupees. If you plan for a long-term goal and think of building an asset over time which will add to your monthly income then you can get more than a house probably in less than 15 years.
You can get a bungalow in less than 10 years.
If all these things sounds unrealistic to you then I know you are unsure about the difference between a liability and asset.
Difference between an Asset and a Liability
Let me explain you the difference quickly.
Liability is anything that sucks your money. For ex – a car is a liability.
As long as you own a car, you will have to fuel it. As long as it is with you, it will suck your money.
Similarly, a house is a liability. It will suck your money to the extent until it becomes yours completely or even after that.
The house bills and maintenance cost.
The tax you pay; all that adds up to liability.
On the other hand, the asset is something that pays you money. For ex – Your shop is your asset.
As long it stays with you, it will inevitably fill your pocket.
If you use your car as a taxi, then it becomes an asset for you because instead of taking the money it will start paying you.
I hope I have made a clear distinction in a fewer words.
Now, you know a brief difference between an asset and a liability. The next step in the equation is the HOW?
How in the world are you going to build up assets while working 9-6 in the office?
Trust me, this is the most daunting thought.
When I first started working, I also thought the same way. How in the world I can focus on creating assets when I’m trapped in this 9-6 job (rat race) but then I read books and got the answer.
How to manage finance in a better way
Let’s quickly go back to the same person who has just found a job as a fresher.
Now, he is different from the one we talked in the part one. This guy has financial knowledge and understands the difference between an asset and a liability.
Instead of saving up the money to invest in a home 5 years later, he starts to create small assets with it.
Suppose, he was getting 21,000 INR in hand salary. He chose to divide this salary into 3 parts.
First part – Expenses.
The total cost of living he requires to survive in the city by not being a Cheapster.
Maybe the city was very costly, so let’s assume 50% of his salary was getting spent in his living. By living I mean, the rent of his house, food, transportation, leisure, shopping etc.
After his expenses, he is left with 10,000 INR.
He has two choices now. Either he can save this money for future investments or he can plan his future. He decides to divide this money further in two parts.
Second part – Build Assets
He takes out 70% of the remaining salary and chose to build assets with it.
So, out of 10,000 INR, he took 7000 INR to build his assets.
He started investing small but consistently in long-term stocks, mutual funds, bonds. Whenever he is able to save a little more he uses to invest that money here.
Therefore, over time he was building a column of an asset for himself which is going to change the entire course of his life.
Third part – Savings
Remaining 3,000 INR is the saving amount that is left with him after taking out the everything.
But let’s assume this guy is generous (like me :p), he chose to further part this into 2 parts.
He takes our about 10 percent of his saving for charity. 10% of 3000 is 300 INR.
He takes 300 INR and does charity in weekends (I will leave it to you).
After all, giving is also important.
Remember 10% is a big part of someone’s saving. If every citizen living in India can take out 10% of their savings, each and every child of our country will get a proper education. Lastly, he is left with 2700 INR for his saving.
A perfectly happy citizen who is building his future while enjoying the present.
Who wouldn’t want such a life?
The asset-building part is not limited to the things I mentioned in this article. There are tonnes of other ways through which you can build your assets.
The long-term idea is to build assets and leverage from 9-6 jobs which are keeping you trapped. Remember Financial Freedom must be our Primary Goal.
If you want more information on finance. Then contact me and schedule a meeting. A good early investment decision can change the entire course of your life.
If you are filled with uber energy to do something then startups are probably the right choice for you.
But let me warn you, I have been there and tried that. If you cannot sustain without money, then do not step into startups. Because the risk cap is a lot higher and you should never test the waters with both feet.
So, think before you take the step in this direction. If you are in a 9-6 job then it becomes painful to run it side by side. I’m not saying you cannot do it, I’m just saying it will take a lot more to do it.
How do you manage your expenses and use your salary?
What is your financial strategy to freedom?
Do let me know your thoughts on this one.