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Old 15th March 2012, 00:21   #76
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Default Re: Debt free life?

Hi, I know there is general aversion to debt and many people fear it. But my take is different. One should know how to smartly use his credit facilities and chose wisely depending on his requirements. Two opportunities one should never miss is credit card and more importantly the home loan.

1) Credit card - rule number one is that you should set an autopay facility to pay the monthly amount in full automatically from your salary a/c. Rule number 2 is that you should not use your credit card for huge one time purchases like white goods if it is beyond your means to clear within the credit period. Creditcard saves money for you through accumulated points and whatever meagre interest you save by keeping your money in your savings a/c longer. And ofcourse it gives you convenience (which a debit card can also give).

2) Home loan - Even at current levels the effective home loan interest rate is below 9% when you include tax benefit (even lesser if its your second house) which is less than FD rates offered on your deposits. I personally do not beleive in buying a property for keeps - most of us do not know in which city/com we will be working 5 years down and even if we are sure we will be in City A forever, why lock yourself in the same property till the end of your life, enjoy change by shifting to a better, new house (on rent not own house) after every 3-5 years in the same city . But use your home loan eligibility to invest in good properties after you do enough ground-work. Once you are sure your motive is investment there will be various options to take lower risk, spread your risk in different properties and get higher returns. But if your motive is to always stay in the house you own, your options will be less (near the office, large enough for family, parking for 2 cars, ready-to-occupy etc which may make you to stretch yourself to take too much debt) and you endup lockingup your invested capital.

By using your repayment capacity you are actually leveraging to make an investment which can potentially give you very good returns. Even if you can afford to buy a house worth 50 lacs, you should still take a loan of 40 lacs and invest only 10 lac of your own cash. Assume you get a profit of 12 lacs on the property after 2 years (property price went up by less than 12% each year). If you had invested 50 lacs cash your return is 12/50 = 24% in 2 years whereas if you had invested just 10 lacs and paid even paid 4 lacs as interest in 2 years, your return is almost 8/10 = 80%. The rest 40 lacs of cash you had in the beginning can be invested in any other investment option like PPF, Balanced mutual fund, gold etc. This will give you enough liquidity for emergencies and grow your money thru various investment vehicles. This liquidity woudnt have been there had you locked up your entire 50 lacs in the property.

Do not fear your monthly EMIs, would you use that money in any better way had you not taken the loan? It would have most probably been usedup in avenues that do not give you any returns. It is not true that a mortgaged property cannot be sold. A mortgaged property can be sold as easily as a normal property (I have sold 2 times in last 4 years) without closing the loan with your own cash. The loan gets transferred to the buyer and most of your potential buyers would take a loan themselves.
The rules to followed strictly while expoiting your credit capacity (remember this has a shelf life too, and you forego it each year you do not use it) is to arrive at a EMI figure that is comfortbale and chose a property after considerable research. Real-estate is still a great investment option in our country and you get to make money with the banks money if used wisely.

If anyone reading this post has faced financial issues due to a home loan or credit card, pls analyse the reasons onceagain before pointing the gun at me

Cheers

Vindy

Last edited by Technocrat : 16th March 2012 at 03:29. Reason: Edited to make the post more readable, please leave some space between paragraphs for better reading, thanks
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Old 15th March 2012, 00:31   #77
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Default Re: Debt free life?

Quote:
Originally Posted by Ricci View Post

Of late, we seem to have economic crises with increasing frequency as compared to the post-WW2 the 90s era , where you had 2-3 severe economic meltdowns.
My favourite quote from warrent buffet:

‘I will tell you how to become rich. Close the doors. Be fearful when others are greedy. Be greedy when others are fearful.’

This holds good while buying any asset - house, stocks etc. You can use economic crisis to advantage if you are patient and keep saving. Patience Wins!
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Old 15th March 2012, 00:46   #78
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Default Re: Debt free life?

Quote:
Originally Posted by clevermax View Post
Good question... But won't your IT return statements for all these years work? Have never thought about ending up in such a situation.

But you won't be in a position to take a heavy loan when you have savings! So I guess it shouldn't be a big problem.

Anyway, I have a clean credit card history with over 6000 credit points.. but since I always linked the CC to my savings account for autopay, it was never a real debt.
Quote:
Originally Posted by carbookie View Post
If you have income proofs, you can get a loan without CIBIL score.
Its easy for a salaried person to provide an income proof. Not for someone who is running a small business. I have heard some say that there is no point in filing true IT returns. Hence, I think there is nothing wrong in building CIBIL score, by spending through CC, and pay the bill in full, and by taking small useful loans.

------------------------------------

Also carbookie, as of now, I'm debt free. In fact, I haven't had a debt since I was out of college. I have bought a bike, a car, two Jeeps, a small property and some other valuables, with my savings.

But, right now, I'm planning to move in to a different area. Hence my options are:
  • Buy a house.
  • Rent a house.
I have some money saved. So, does it make sense for me to live in a rented house, or to pay the rent towards EMI?
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Old 15th March 2012, 01:46   #79
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Default Re: Debt free life?

Of course a debt-free life is possible. The generation to which most of our parents belonged have done it almost all their life.

I have no loans currently except partial disbursement of a home loan. The reason why a home loan is essential is because of the "real estate bubble",which keeps growing and pushing prices of property beyond our reach, however much we earn. I call it a bubble because I am an architect and I know a little bit about land, buildings, housing, cities and the environment. When the bubble will burst (unless it has already started), nobody knows. But it will, one day, is my feeling.

However, I have still taken a home loan because it will (hopefully) allow me to stay in my own house with dignity without the bad-taste-in-the-mouth feeling that most tenants have felt some day or the other. I have, effectively, written off the EMI amount from my salary and expect no appreciation or profits from the property I am trying to buy in bits and pieces. Just a place to stay. I have no other property either directly or through inheritance and have never felt the urge to extend my footprint.

The fact that I am single probably helps me maintain this attitude. Life has taught me to REDUCE CONSUMPTION, CONSERVE avoid WASTE. The only indulgence I allow myself is driving my car about 1700 km a month when I can easily reduce it to 1200 km a month or so. My existence is otherwise quite spartan though not threadbare. I love a good gadget when I want one but often agonise over buying it if it feels expensive.

I bought both my bike and car on loans. Both times, I was careful that my liability should not exceed my savings locked in funds, investments or suchlike. The car loan was foreclosed in 3 years instead of 5. We all know that this is not always possible with a home loan, so no point bothering. I look upon it like the rent I pay every month.

Within two years out of college, I realised that I was not cut out for a career in the commercial side of my profession (i.e. doing work where profits / commercial sense of the project is more important than its impact on the life of people). I do see a lot of my peers buying things I can't afford, but I have made peace with it. It was not easy as a 20-something but its easier as a 30-something.

Besides, I find the idea of buying gadgets, phones, holidays on EMIs stupid. Unless it something you really want (like an avid photographer wanting a Rs 3-lakh camera). The only thing I would probably take loans for would be homes and (possibly) vehicles. It is far easier to live within my means and/or demand rightful compensation for my work if I feel underpaid.
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Old 16th March 2012, 03:27   #80
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Default Re: Debt free life?

Note From Support : Guys, this thread is very specific about Debts & topics around it. For financial Planning related discussion we have a separate thread Link (Are most of us living on the edge? time to plan up things for the future.). Please do not mix the two subjects. Thanks
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Old 16th March 2012, 08:19   #81
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Default Re: Debt free life?

First things first, @carbookie, really admire the way you have managed to be totally debt-free. And till I read your post(s), I was of the opinion that anything except a house could be bought without loans. But yes, even real-estate can be bought without a loan, like you narrated. The key being not just saving, but investing the savings wisely to generate better returns.

Like many here, I also abhor debt - maybe our parent's views rub off on us and help decide what financial choice we make.

I use credit cards liberally, but have never ever rolled over payments - always pay back in full. I like the convenience it provides - hate carrying around a wallet full of money. I could use debit-cards too, but am paranoid (like others here) since it is linked to my account.

Have taken just 2 loans till date :
1) First was a zero-interest loan from my orgn. for buying my bike in the early-nineties - I had just started working & the only other option would have been to wait for months. I had already been waiting since college for a bike and could not delay it. Ofcourse I opted for monthly installment to be double what the orgn. required, so as to pay it off quicker, even though no interest was involved. And infact paid off the whole thing before its term using the year-end bonus/incentive.

2) Second was in 2005 to buy the Baleno. Had the cash to buy it outright, but interest rates were so low then, it would have been stupid not to buy on loan. Took a 4lakh loan for 2 years (EMI 17440), with the interest payout being much less than what could be earned on the principal via even FD.

Since we have a flat here, I never seriously looked at a home-loan, but am currently toying with buying one on OMR, mainly for the tax benefit. Since I could buy it without a loan, this 'debt' is not something that is going to worry me.

Car-lease is a good option and I would not think of it as a debt in the normal sense of the word. The benefits are immense - tax-free EMIs, fuel-exp, maint-exp, driver-salary etc are too good. Sometimes I feel like taking a car on lease, though I have no need for another car.
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Old 16th March 2012, 19:41   #82
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Default Re: Debt free life?

Quote:
Originally Posted by architect View Post
I have no loans currently except partial disbursement of a home loan. The reason why a home loan is essential is because of the "real estate bubble",which keeps growing and pushing prices of property beyond our reach, however much we earn. I call it a bubble because I am an architect and I know a little bit about land, buildings, housing, cities and the environment. When the bubble will burst (unless it has already started), nobody knows. But it will, one day, is my feeling.
If it is a bubble, why not save and buy at low rates when the bubble breaks?
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Old 16th March 2012, 20:01   #83
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Quote:
Originally Posted by VindyWheels View Post
2) Home loan - Even at current levels the effective home loan interest rate is below 9% when you include tax benefit (even lesser if its your second house) which is less than FD rates offered on your deposits.
Can you please elaborate this point? Is there any additional tax incentive for second house loan?
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Old 16th March 2012, 20:58   #84
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Default Re: Debt free life?

Quote:
Originally Posted by VindyWheels View Post
effective home loan interest rate is below 9% when you include tax benefit (even lesser if its your second house)
Quote:
Originally Posted by ani_meher View Post
Can you please elaborate this point? Is there any additional tax incentive for second house loan?
Let me try to explain what I think it might be.

Self Occupied Property: 1.5 lakh limit on Interest deduction. Let Out Property: No limit on Interest deduction. You need to declare rental income (or) notional rent under clause 'deemed to be let out' when used for own(parents,etc) residential purposes.

@Vindywheels is probably referring to the situation where the second home is usually a 'let out property. However, you would get the same additional benefit when you purchase your first house & declare it as 'let out' (usually in a different city). A little math might be required to validate the extra savings on a case to case basis. Thumb rule: Huge Loan - better to declare as 'let out'.
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Old 16th March 2012, 22:21   #85
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Default Re: Debt free life?

Hi. I am debt free.

That is because none of the banks and financial institutions are willing to lend to me. :-D

OTOH, biwi, who has a monthly income roughly equal to my quarterly income (please do not "undervalue" me - I am in top 20% earners among KL govt servants) has loans for ... let us see..

a. car.
b. festival advance

That is it.

The flip side.

Together, we pay about 45 days worth of my gross income as income tax. That would have been nil if we had a housing loan. Are we really better off without a loan?

If I was in business / profession, I could have (a) claimed depreciation on the car (b) claimed interest on car loan as business expenses (of course, subject to certain conditions). If I was in business / profession and purchased the car from my own funds, I would not be able to claim interest for the car loan as part of business expenses.

And I know smart guys and gals who borrow at peanuts rates of interest (from specified sources - like employers' concessional schemes) and then invest in fixed deposits at higher rates.

Edit:-

There are three classes of people - the haves, the have-nots, and the have-not-paid-for-what=you-haves.

Last edited by BaCkSeAtDrIVeR : 16th March 2012 at 22:23.
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Old 16th March 2012, 23:02   #86
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Default Re: Debt free life?

Quote:
Originally Posted by mxx View Post
If it is a bubble, why not save and buy at low rates when the bubble breaks?
Simply because when the real estate bubble breaks, we architects would be the first to be out of business. :-).

I cannot live endlessly in rented premises waiting for that day. So I have simply written of my future EMI from my income as a replacement for "rent". If property appreciates, great. If not, I have a roof over my head.

Why current Real Estate is an unsustainable bubble is reason for a debate that is far, far beyond the scope of this thread. I am willing to take up this matter elsewhere if you are interested. It is because of certain inherent flaws with our current model of "development" and "economy". But we would be going severely off-topic here now. It needs a fundamental paradigm shift in our current way of thinking to understand it. Being continuously bombarded by only one kind of information about "money", about "investment", about "economy", about "growth" makes it very difficult for us to believe anything otherwise.

Last edited by architect : 16th March 2012 at 23:03.
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Old 16th March 2012, 23:13   #87
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Default Re: Debt free life?

Quote:
Originally Posted by BaCkSeAtDrIVeR View Post
Together, we pay about 45 days worth of my gross income as income tax. That would have been nil if we had a housing loan. Are we really better off without a loan?
AFAIK:
If you earn more than 10 Lakhs p.a. the saving with just a home loan paying interest beyond full limit (1.5 lakhs) and principal beyond full limit (1 lakh) you will save Rs 65,xxx per year.

The saving by renting a house at full HRA value is better.

The best tax saving is if you own a house in a different city, let it out on rent. You rent a house for yourself in the city, where you work at full HRA level.
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Old 16th March 2012, 23:56   #88
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Default Re: Debt free life?

Hi,

Its already explained by Don. If you are paying interest of 4 lacs for your second home loan, you can delcare a rental income which could be the nominal rental income (lets say 1 lac per annum) and adjust both interest expense and maintenance cost (lets say 25000) against the said income and declare a loss of Rs 325000 on the property. So you can end up getting even more income tax benefit on your second homeloan.

Quote:
Originally Posted by ani_meher View Post
Can you please elaborate this point? Is there any additional tax incentive for second house loan?
Rgds

VW
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Old 17th March 2012, 10:17   #89
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Default Re: Debt free life?

Most of us aren't Debt free, so the next question that comes to my mind is what Debt is healthy and which one is unhealthy. Two days back i closed both my Credit Cards, so i do not have CC Debt, I have a house Debt and a Car Debt and my monthly fixed outgo (Which includes Debt + Rent) takes up about half of my monthly net salary (In total). The other half is for sundry expenses and savings.

I make it a point to have at-least 3 months of my salary as fixed deposits available for emergencies and the rest is in long term investments which i never touch.

@Carbookie/FinancialGuru would you consider me in financially safe state. I think i am, but it will be worth while to hear form experts.
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Old 17th March 2012, 10:30   #90
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Default Re: Debt free life?

Living "debt-free" is a state of mind. You may not have any loans or any other committments but remember that you have the following:
  • Utility bills (They are short term debt, to be paid on a monthly basis)
  • Taxes (Cannot live without paying them)
  • If you have children, their school fees
  • Your investments (you do pay some EMI's on those, correct?)
I know what I am saying above is not a real debt, but you need to pay for all of this, cash or card, beg, borrow or steal. At the end of the day, these are some of the minimal debts that I could think of.

The list is endless. In my books, everyone has a debt to repay - Monetory or Goodwill.

PS: I wish I could say I am living a debt free life; I did relish it for a month, but my wife just gifted me a car (so again in debt for a couple of months!)
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