Common Man: Is he better off than the poor?

Money doesn’t grow on trees. True, money doesn’t grow on trees. That’s what we were taught in our childhood. And that’s what even our Honorable PM reiterated in his address to the nation after the Government’s decision to allow FDI in Indian retail. And who better than the common man can understand this. In 65 years of independence, if there is someone who has undergone a massive transformation, it is undoubtedly the “Aam Aadmi”, the “Mango Man”. Much more literate yet powerless, larger in number yet politically insignificant, a thousand times richer yet vulnerable to price rise and inflation.

Since policy level debates still keep raging about an absolute definition of poor, it sometimes becomes difficult to really separate them from the middle class. However, is the middle class common man really better off than the perceived poor? Every month his earnings get wiped out in a wave of EMIs, credit card bills, groceries, utility bills, fuel expenses and house rent. It’s hardly a matter of 7 days when he could see his salary getting vanished in the monthly Tsunami of expenses – painfully reading through the SMSs after any ECS from his bank account. And then spend the rest of the month wondering what actually a salary denotes. Just like the poor, even the common man lives in a more or less hand-to-mouth situation. Except that poor live in mud houses, we stay in brick-and-mortar apartments; poor doesn’t have an LCD, AC, refrigerator, microwave, home theater – we may have them all. But are we still better off ?Poor does not have any saving. So does most of the middle class. They do not have any constructive old age planning. So does a common man.

But before moving further, let’s hold on – if we feel that poor need financial literacy; if we feel that they need to be taught how to save money; if we feel that they need to be taught how to manage their finances then it’s a complete misconception. The poor are much smarter than the rich or even the middle class. For a villager living in abject poverty, every paisa is like a father – mother. The calculation is rather a way of his life. If he doesn’t do so, he cannot survive. Although the middle class has reasonable access to all kinds of financial instruments, we still keep wondering about what and how about savings whereas a poor villager may not even have a simple Bank account.

Common Man

So where does the common man stand. He is neither poor nor rich. He earns more than a poor, but still struggles to meet his ends. He may understand his environment much better but still remains in a bigger dilemma than the poor.

A simple example – I am sure not many of us would have actually considered knowing how much insurance coverage we have and how much is needed. In most likelihood, we assume insurance to be an investment. Whereas it’s essentially a risk cover against any eventuality of death. But unfortunately we take death for granted and only think in terms of investment rather than incurring a cost of securing our families in case of our death. An eventuality we are sure to occur but still keep ignoring.

Similarly, not many of us would actually bother to check our credit history as available with credit bureaus. In fact, we may not even be aware of the existence of credit bureaus although the first credit bureau was established in India 12 years back. Even I bothered to check my credit report only after applying for a home loan and learnt about a credit card default on my name for a fictitious amount of just Rs. 100 on which the credit card company kept on charging penal interest for 12 long months while I was assuming that I have cleared all my dues.

When it comes to savings and investment, no discussion is complete without any indication about real estate which is perhaps perceived to be a safe, guaranteed and lucrative medium of savings and money appreciation. But the satanic habitation of black money and builder-mafia nexus makes it a highly diabolical investment avenue. And with the corruption ridden system in our country, playing around with the relevant laws is almost on the fingertips of politicians, authorities, bureaucrats and of course the builders. In the absence of a real estate regulator, this becomes a pure arm twisting game. The recent real estate crisis in Noida Extension (UP) stands testimony to this. Triggered by a revolt by the farmers in the area against the authorities for rationalization of land acquisition compensation, the Allahabad High Court scrapped few land acquisition deals putting at stake all real estate projects in the region as also crores of money invested by more than 1 lakh buyers. In the midst of a fierce battle between farmers, authorities and builders, it is the innocent buyers who are paying the actual price – delay in property possession, unwarranted price escalations, the abrupt cancellation of bookings, unjustified penal charges, interest on bank loans even when construction is on hold and above all – harassment in the hands of the builders – the buyers are having enough on their platter to have a series of sleepless nights. Added to this, housing finance also remains to be loosely regulated business in India. And everyone seems to be taking undue advantage of all these loopholes duly aided by the helplessness of the buyers – the common man again.

So, somewhere the “Aam Aadmi” remains negligent, somewhere ignorant and somewhere helpless. Therefore, the million dollar question that keeps raging in my mind – “Is the common man really better off than the poor?”

Think before you invest in a second home

Investment in property is one of the high risk, high return avenues of wealth generation. As disposable income is increasing, many people started investing in the second home. Are you thinking on the same lines? How about streamlining your thoughts to make a better decision? Yes? read on…

1. Your appetite and eligibility for a second home-loan

The most important thing is the availability of funds for the initial down payment. Initial down payment is generally 20% of agreement value and charges towards stamp duty and registration. For this amount it not advisable to go for any loan. Also check your EMI for the new loan before booking property. Generally Cumulative EMI of all your loans (Home loan for 1st, 2nd home, car loan, personal loan etc.) should not exceed more than 40-50% of your in-hand salary. Banks would definitely verify this before approving your loan.

2. The appreciation in property cost

Any city area can be categorized into 3 types, a developed area, a developing area and an under-developed area. As an investor it is good to focus on projects in developing area. There is very little room for appreciation in Property prizes in developed areas. Properties in an under-developed area might be cheaper in terms of valuation but the risk associated with it is very high. Also capital appreciation in this area might take more years than once can predict.

3. Do your financial math

If you are planning to buy under construction property calculate the value of your property when completed or at the time of possession.  Let’s look at following case study. Investor A booked flat in a project for 40 lacs with lead time of 2 years. Disbursement of payment will happen in a staggered manner based on the progress of the project.

* For simplified calculation, consider all charges included in 40 Lac (Sales tax, VAT, Stamp duty, Registration, infrastructure charges etc.) 

 

Home Loan Calculation
Disbursement Month Payable Amount Disbursement Amount Actual payment including interest (@ 10%) as on Jan’2014
Month 24 Jan’2012 25% 1000000 1220391
Month 22 Mar’2012 10% 400000 480121
Month 19 Jun’2012 10% 400000 468315
Month 16 Sep’2012 10% 400000 456800
Month 13 Dec’2012 10% 400000 445568
Month 10 Mar’2013 10% 400000 434612
Month 7 Jun’2012 10% 400000 423925
Month 4 Sep’2013 10% 400000 413501
Month 1 Dec’2013 5% 200000 201667
Total Payable 4000000 4544899

 

In the above case, even if property cost is 40 lacs only, investor A actually ended up paying around 45.5 lacs, assuming he received the possession of flat in 2 years. More delay in construction will increase the cost of property and will reduce the return on investment.

4. Long-term horizon

If you want a higher return on investment, hold the property for longer duration. Generally holding flat/house for 5-10 years will give better returns with few exceptions. After 10 years, maintenance of the building will increase; also finding a buyer for the older property is relatively difficult.

Finance for your dream home

For most of the people, buying a first home is a very challenging task. One of the challenge they face is that an affordable house is not available in the locality they prefer. People often do mistake by choosing locality/specific project before working on finance aspect. It is always beneficial and time saving tactic to decide on your budget first. Based on the budget, look for the locality/project. There is no point in searching the property if you do not know your financial appetite.

Home buying is a long term commitment. So ask a few questions to yourself

Have I saved enough to pay for down payment?

This is the initial amount which needs to be paid from your pocket. Generally down payment is 20% of agreement cost. In addition to the down payment, you need to pay for stamp duty, registration charges, sales tax and VAT. Most of the banks do not include these charges in loan amount. It is not advisable to go for another loan for making down payment.

How much EMI I can afford?

Equated monthly Installment (EMI) is the payment made every month towards home loan. EMI of all your loans should not exceed more than 40-50% of your in-hand salary. Loan adviser might suggest you to consider your future salary hikes/promotions for increasing loan amount, thus EMI. But do not buy with this option. Even though you might get a salary hike or promotion, it is associated with inflation. Your home expenses will keep increasing too. Consider the worst case scenario, if you have over-committed on the EMI and home-loan interest rate also rises, you might default on your loan and calling for more trouble.

Do I have enough fund balance after making down payment?

For emergencies, you need to keep aside some amount. You should not spend all your savings towards the down payment on the house.

Can I afford both EMI and rent for initial period?

If you have booked under construction property and currently staying in rented house, you might have to make payment for both EMI and rent till the time you get possession. Even though this is a temporary situation, keep aside some money for this scenario.
Most of us want to buy home as early as possible, but buying home come with long term loan liability. If you do not have enough funds for down payment, wait for some time. Plan short term goal and create a corpus for down payment.