Out of the three basic necessities of Roti, Kapda, and Makaan taught to us by popular media, acquiring the third one seems to be the most daunting task. While inflation has made all three of these costlier with the passage of time, prices of real estate and housing have seen the most tremendous rise over the last few decades.
So what should one do? Turn into a vagabond and go homeless? Obviously, that is not quite a very practical option, so much so that it's best left not considered as one.
A somewhat viable option is renting but it only fulfils the survivalist need of having a roof over one's head. Almost everyone wants a house to call their own that they can build from the ground up or design and decorate however they please.
A solution to these problems comes in the form of loans. Home loans to be precise. They allow people to buy homes without having to bear the burden of paying a hefty sum on their finances. Home loans fund the purchase of the house by paying the total value of the house to the seller and collecting the same amount from the buyer in instalments with an interest charged for providing these services.
But not everyone is in favour of incurring a loan to purchase a house. The huge cost incurred in the acquisition of a house is bad but a massive loan spanning over the majority of a person's life isn't any better. This is why today, we explore the financial journey of buying a home without a loan.
Plan your Goal
No point in setting out on a journey, if you haven't even decided where you want to go. As far as you are concerned, the goal is set - Buying a home. Now comes the part that involves thinking, or making the plan to reach your destination.
What? You didn't think that just knowing the goal was what you needed to do right? A goal gives you a direction, but a plan moves you in said direction. So, "What does a plan to buy a home involve?" You ask? Here's a not-so-exclusive list to help you get started on this journey.
i. Know your costs
Buying a home does not just involve paying the price of the house. The list of costs you incur includes more expenses like registration costs, and renovations (if necessary). So it is necessary that prospective buyers make their plans according to the real cost involved and not just buying the house.
Future homeowners should therefore prepare a budget that lays out the various expenses that will actually be incurred when purchasing a house and make arrangements for the appropriate amount of funds for such an acquisition.
ii. Set a Realistic Timeline
Nothing hurts more than to have a dream, only to have it crushed by the hands of reality. A poorly planned timeline for the purchase of your dream residence can lead to some very disappointing results. Thus, not only is it necessary to have a plan for your dream house, but it is also equally important to set a reasonable and realistic timeline to fulfil the goal.
Expecting to buy a house worth more than 100 times one's monthly income in 5 years or so without any other financial backing is a doomed plan that would only meet disappointment. (change to figures of example)
iii. Know your current financial standing
Lao Tzu, a Chinese philosopher once said, "The journey of a thousand miles begins with a single step." What he didn't mention was that you can take that first step after getting a head start.
Existing savings and investments will help your finances be prepared for a hefty purchase like a house. You can use these already available funds to either finance your purchase or handle your other expenses so the purchase cost doesn't reduce your standard of living.
This is where the Recipe by Finology comes in handy. Recipe makes Financial Planning for projects like buying a house a fun, DIY project. Users can input their existing savings, goal value (cost of a house in this case) and time horizon for achieving the goal. Recipe will take this information, and show you how much the asset is going to cost at the end of the selected time period, the value of your savings by that time as well as the necessary amount of savings to achieve said goal. Not only this, but Recipe will also show you changes you can make to your plan, to make your goal more realistically achievable.
Evaluate your financial profile
Now that you have decided where your destination is and the path you wish to take to get to said destination, you should also know about the path already behind you and where you stand. Without getting any more philosophical, allow me to explain that the next step is to understand your existing financial conditions.
The list of things one should consider before undertaking a significant spend as the purchase of a house includes, but is not limited to the following:
i. Emergency Funds
Accidents don't come knocking, and it is not just prudent but common sense to prepare an emergency fund for… well, emergencies. When a plan as significant as the purchase of a house exists in a person's mind, they often focus only on this goal and tend to forget other aspects of their financial life.
An emergency fund is quite similar to a person's savings with the only difference being purpose. While savings are usually created and maintained to meet certain goals like the purchase of a phone, car, or even a house, emergency funds are prepared to protect a person's wealth during financial crises like loss of job, sudden hospitalizations due to injury or sickness, etc.
When it comes to emergency funds, saving a sum equal to or greater than at least 3 months' salary is a healthy habit.
ii. Spending Habits
When buying a house without a loan, some stress is naturally expected on the person's finances. During these times, unhealthy spending habits will deplete a person's funds and expose them to the need to avail debts to stay afloat.
Taking a personal loan to recover from financial erosion, all because you wanted to avoid taking a home loan. Now doesn't that seem like a sorry story?
New homeowners must be aware of their spending patterns and must make necessary changes to accommodate for the new and significant spending that is the purchase of a house.
The Spending Habits calculator by Recipe analyzes your spends on wants and needs and tells you whether your spends are more than what they should be in comparison to your income.
iii. Debt Management
Even though you are avoiding a loan to purchase your house, there might be some loans that you already have or might be looking to take. The reason you are avoiding taking a loan might even be because of pre-existing loans already on your account. Whatever the case may be, a proper analysis of your current and future debt status might be necessary.
This step makes sure that the cost of purchasing your house doesn't make it so you are unable to repay your existing obligations or cannot avail of new loans for other purposes as an additional loan might jeopardize your finances after incurring the expenditure of acquiring your house.
Don't just save, invest
So, to buy a house for oneself, without a loan, the trick is to use one's savings. This is why along with planning the financial steps mentioned above, one needs to create savings that reach the standards for the goals that they set for themselves.
People have a strange mentality towards savings, however, people try to save before they've met their expense requirements, causing them to end up using those savings as more money is needed. Another mistake people make with their savings is that they leave them to stagnate.
Saved money is not supposed to be left in a tijori somewhere. Your savings are supposed to become a second source of income for you. This income can be achieved by the means of investing.
Investments have various avenues for people with varied risk appetites. The most popular means of investment are shares, mutual funds and precious metals. Investment in metals is an outdated method and stocks and mutual funds require some screening to achieve the desired results from one's portfolio.
Recipe by Finology has a section to help with this as well. Recipe has Stock Recommendations handpicked by financial experts to make sure that your portfolio meets your financial needs.
Conclusion
Buying a home is a big step in any individual's financial journey. While the decision to buy one without a loan makes it difficult, with proper financial planning, the lack of an obligation can become a pretty freeing experience.
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