Managing your finances after getting a home loan

Nineteenth-century American businessman and philanthropist, Phineas Taylor Barnum, once said, “Money is a terrible master but an excellent servant.” If you are disciplined, you can solve your biggest problems through it; if you mismanage it, it can make your life miserable — that’s the power of money.

When you take a home loan, you spend a substantial amount of your monthly earnings in paying off the instalments. But at the time, your monthly expenses such as utilities, essentials, and tuition fees of children don’t stop — they are your recurring expenses. You need to make payments for them along with repaying your home loan.

In such a situation, the importance of money management comes to the fore. It’s like living a life where your home loan and other monthly expenses don’t pose any psychological pressure on you. There are many dos and don’ts to doing both things in tandem. Let’s discuss a few, shall we?

Dos:

1. Create a budget

For everyone, including a home loan borrower, there are unavoidable monthly expenses such as mortgages, groceries, healthcare, and entertainment. Make a list of these expenses at the beginning of every month. Add your home loan EMI to it. The remaining money is the amount you should cover your monthly expenses with.

2. Maintain an emergency fund

A personal finance platform, Finology, in a money habit survey in June 2023, revealed that only 25 per cent of Indians maintain emergency funds. When you are repaying a home loan, make sure that you also squeeze into that elite 25 per cent.

Having an emergency fund for expenses such as medical bills or unexpected home repairs will give you the freedom to repay a home loan without any mental pressure.

3. Continue saving for retirement

When a change in an interest rate can extend your loan tenure by several years or inflate your monthly instalment considerably, you need to ensure that your retirement life doesn’t get affected. Invest money in a good retirement plan and continue pursuing other financial goals alongside repaying your home loan.

4. Set up automatic payments

Automatic payment is a disciplinary exercise that helps you pay home loan instalments on time. It is best if you set the home loan automatic payment on your salary day. It will ensure that you don’t default.

5. Allocate budget for home maintenance

Maintenance-related problems are bound to happen in a house. If you delay the repair for too long, it becomes a huge problem, requiring you to shell out substantial money for the same. Allocating some monthly budget for home repair diligently will come in handy in such situations.

6. Ensure your insurance plans are up-to-date

Natural disasters or new diseases are unseen calamities, leaving the affected with little or no money. Make sure that your health insurance has coverage for critical diseases, while your home insurance has coverage for natural disasters.

Don’ts

1. Don’t neglect financial goals

Your children’s education, retirement planning, or paying off mortgages are as important goals as repaying your home loan. They are all part of your financial freedom. So don’t ignore them.

2. Don’t ignore changes in income and expenses

Income and expenses are not static. Your income sources may increase or decrease depending on your ability and job. Likewise, expenses increase with inflation or when you make lifestyle-related changes. Don’t adjust your financial plans; adjust your expenses to repay your home loan on time.

3. Don’t take on additional debts

Taking one loan at a time helps you focus your energy on one goal. If you are in a situation where taking a second loan is unavoidable, take it after due diligence. Check with banks that offer lower rates and assess your financial options to repay it.

4. Avoid using home equity for non-essentials

The thumb rule is that luxury is afforded when you have more money than your monthly expenses. Do not use home equity to spend on luxuries such as an exotic vacation or unnecessary home renovations. It will add to your financial burden.

5. Don’t ignore refinancing home loan

Refinancing is closing your existing home loan and taking the same from a lender that offers you a lower interest rate. After refinancing, if you keep your monthly instalment the same as before, you will pay off your home loan much earlier.

6. Don’t miss loan repayments

Even if you can’t pay off your monthly home loan EMI, inform your lender and discuss a potential solution. This way, you can save yourself from late payment penalties, and your Cibil score won’t be affected.

7. Don’t rely on credit cards, loans

Do not use your credit to repay your home loan; it can lead you into a debt spiral. It’s like you are taking another loan to end your current loan. The end result can be a financial disaster.

A home loan is a costly affair as the amount is high and the duration is long. You can achieve it if you are financially disciplined. You need to inculcate some good money habits and choose the right path to financial freedom.

Author is CEO, and Co-founder, of Basic Home loan. Views are personal.