It’s time to celebrate when the home loan is finally paid off after years of servicing EMIs, or equated monthly instalments. There is jubilation, and relief. After all, the house is finally (technically and financially), yours. What next? Your home loan is over. That means you now have surplus money left over each month in the absence of EMIs. What should you do with that money?
Unless you love real estate, you may not want to take another home loan and repeat the process. Don’t get me wrong. If you think that it is right to invest in real estate again, then go ahead. It’s your money, your call. But what should you do if you don’t want to borrow again?
Being a Sebi-registered investment adviser (RIA), let me first put on my advisory hat and then, later, a more friendly one.
It may sound boring but I have to say this. Most of you have heard about why having an emergency fund can be a life saver. And if you already have one in place, then skip reading this paragraph and move on to the next one. But if your emergency fund is not properly funded, then this is the first thing to tackle with the new found surplus. The minimum that you should aim for is one having at least six months’ worth of basic expenses as your emergency buffer. If your basic monthly expenses are ₹50,000, then gradually put up an emergency fund of ₹3 lakh. If you are a single earner, have many dependents, and work in a sector where the job stability is lower, then get a bigger emergency fund please.
What next? Go after high-interest loans and credit card debts. Your personal loans are charged an interest of about 15% or more. And credit cards charge a monstrous 35-40% a year! So, use the surplus from the EMI money to start clearing these if you have any. You may ask why not first clear all your loans first before starting to save for the emergency fund. It can be too risky a strategy. Emergencies can happen anytime. So, do it simultaneously if you don’t want to do it one after the other.
After dealing with emergencies and loans, it is time to begin investing ‘more’ properly. Generally, what happens is that most borrowers compromise all their savings plans to aggressively pay off the home loan. But, the idea is to get rid of loans first and then save and invest. So, this is the best time to have a relook at your financial goals, the amount required for each of your goals after taking inflation into consideration, and how much you need to invest. The last is what financial planning is all about. And that is what you need to do—either on your own if you are a DIY (do it yourself) investor or taking help from an investment adviser.
To give you a fair idea, let’s assume that you are a 41-year old married male investor with a 10-year old child. Let’s consider that the investor has cleared the home loan, already set up the emergency fund, cleared all credit card debts. and has a good life and health insurance portfolio in place. Now, it is time to start investing properly for his child’s higher education (which begins with graduation in about 7-8 years) and also for his retirement (in the next 18-19 years assuming retirement is at the age of 60). The investor needs to figure out the amount needed to invest for both these goals and use the money freed from EMIs for this purpose. If the money isn’t enough for pursuing both goals together, he should not be disheartened. Rather, he should start with whatever he has and then keep on increasing the contribution each year as his salary or income increases. Picking the right asset class is important. For long-term goals (at least 7-8 years away), one should start investing in equity funds via monthly SIPs. If not fully then a major chunk if your risk appetite allows for it. Talking specifically of retirement, along with SIP in equity funds, one can also increase provident fund contributions and also invest in the national pension scheme based on asset allocation strategy.
That’s how you can go about using your EMI money once your home loan is over. And, all this is based also on the assumption that you have sufficient health and life insurance coverage.
Is there anything else that you can do? Yes. I remove my adviser hat now. Please don’t try to save it all. Spend some money as well on things and experiences that will make you nostalgic in the coming decades. There is no point being the richest person in the graveyard.?
Dev Ashish is a RIA and the founder of Stable Investor.
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Updated: 09 Aug 2023, 10:34 PM IST
