Personal Finance Guides: December 2016

Hello there! Yes, I know, I am on blog vacation. I have a burning curiosity about a question and I happened to have some time to write now.

If you meet ALL these criteria :

Employed staff (exclude self employed); &
Would continue with your current job without being paid or paid only 50% of your current salary

Yes, this post is for you!

May I find out why do you enjoy being employed after taking away your salary from the equation?

These are some of the reasons I dislike working life, honestly:

KPIs;
Having to follow boss instructions regardless of you being agreed or not;
How to do your work in the way they want;
When to do your work and by when for submission;
Who to manage and sack, if applicable;
Which days to work in a week;
What time you have to report to work and end your work day;
Taking away time from your family, hobbies and running errands;
How many annual leave you have in a year;
Outsourcing big chunk of your short life (say 80 years) to your company by allowing them to tell you how to live your life;
And the list continues...

Would greatly appreciate if you can enlighten me why you love your job so much that you no need to be paid to follow the above conditions?

If the reason you work is purely because of money, then how much do you want? How do you balance between your time spent for yourself and time spent to earn money for your wants? Say from 25 years old till 65 years old where you got most energy and maturity, how many years of these 40 years will you spent earning for extra wants and how many years will you spent designing and living your own life for yourself?

Feel free to give your opinion but I urge everyone to maintain respect for each other. It is a discussion and please do not take it personal. No individual should be quoted or mentioned. Thanks.

Recently I had represented Gulakh to an event where a widely popular and reputed fund manager claimed that he stays on rent and has invested all his money in the markets. And mind you, he is married! :P
It was quite a brave call to make especially when one has earned enough to not only afford an house but also earn substantial income from a job as well as from the markets.

Buying a house has always carried sentimental value. Many dream about getting that right job which can enable them to take an EMI and book a house. Even if it is located in the outskirts. As a Mumbaikar, most of us would know somebody or the other who travels atleast four hours a day.

I have always espoused the idea of renting a house rather than buying one.

Let us try to compare both the scenarios:

Scenario A

Consider Mr H who wants to buy a house worth a crore.
For this amount, he is able to afford a 2 BHK in Borivali.
He is earning Rs 90,000 per month and his wife is earning Rs 50,000 per month.
He avails of a loan worth Rs 83,00,000 and together they can comfortably pay an EMI of Rs 75,000 to buy a flat priced at a crore.
I used this to calculate.

Suppose they have to start paying EMI from Dec 2016, I have considered the following assumptions which seem fair:

a) As mentioned earlier, 54% of their incomes is spent on home loan EMI
b) They are able to invest 20% of their income in mutual funds viz is around Rs 28,000. Every year this amount increases by 10%.
c) Their salaries increase year on year by 15% (considering promotions/job changes)

d) The rest is for all their other expenses

Now how will their investment corpus through SIPs look like in December 2026?

Year	SIP/month
2017	28000
2018	30800
2019	33880
2020	37268
2021	40995
2022	45094
2023	49604
2024	54564
2025	60020
2026	66023

Assuming a CAGR of 15% and average SIP/month as Rs 44,624 one may expect this corpus to grow to around Rs 1.24 crores by Dec 2026.

If we are being very favourable, the value of the property could grow by 15% CAGR, which means in Dec 2026 it would be worth Rs 4.045 Crore.
By Dec 2026, close to 75 lakhs still remains to be paid off.

So their networth could be: Rs 4.05 crore + Rs 1.24 crore - Rs 0.75 Crore = Rs 4.53 crore.
Which would be worth around Rs 2.73 crores as of today considering an inflation rate of little less than 8%.

QUITE IMPRESSIVE RIGHT?

Scenario B

Mr H and his wife rent a 2 BHK in Chembur (Tilak Nagar).
They pay a rent of close to Rs 35,000.
Since they are paying rent instead of EMI, they not only invest the difference between the EMI and rent (75000 - 35000 = 40,000), but they also invest 20% of their combined salaries.
Now let us assume their increase in salary also takes care of the increase in rent (about 5% year on year. And after a point it will remain stagnant)

Now how will their investment corpus through SIPs look like in December 2026?

Year	SIP/month	SIP/month	Total
2017	28000	40000	68000
2018	30800	40000	70800
2019	33880	40000	73880
2020	37268	40000	77268
2021	40995	40000	80995
2022	45094	40000	85094
2023	49604	40000	89604
2024	54564	40000	94564
2025	60020	40000	100020
2026	66023	40000	106023

The average SIP is Rs 84625.

Now since they were young and didn't buy a house, they decided to be aggressive and invest in a mid cap mutual fund like Birla Sun Life Mid Cap Fund. Since its launch in Oct 2002, it has offered a CAGR of 24.58%.

Now let us assume even a CAGR of 18% to be most conservative.

Over a period of 10 years at a CAGR of 18%, this works out to be Rs 2.84 crores

Over 10 years, Networth in the case of Scenario A = Rs 4.53 Crores

Over 10 years, Networth in the case of Scenario B =.Rs 2.84 Crores

Now let us look at what will happen over a 20 year period in the case of Scenario A.

Year	SIP/month
2017	28000
2018	30800
2019	33880
2020	37268
2021	40995
2022	45094
2023	49604
2024	54564
2025	60020
2026	66023
2027	72625
2028	79887
2029	87876
2030	96664
2031	106330
2032	116963
2033	128659
2034	141525
2035	155678
2036	171245

In 2036 Dec, another Rs 55 lakhs would be outstanding to be paid
At a very optimistic growth of 15%, the flat would be worth Rs 16 crores.
Average SIP would be worth Rs 80,184
Mutual Fund corpus would be worth Rs 12.1 Crores.

The networth is an impressive 16+12.1 = 28.1 - 0.55 = Rs 27.56 Crores.

Now let us look at what will happen over a 20 year period in the case of Scenario B.

Year	SIP/month	SIP/month	Total
2017	28000	40000	68000
2018	30800	40000	70800
2019	33880	40000	73880
2020	37268	40000	77268
2021	40995	40000	80995
2022	45094	40000	85094
2023	49604	40000	89604
2024	54564	40000	94564
2025	60020	40000	100020
2026	66023	40000	106023
2027	72625	40000	112625
2028	79887	40000	119887
2029	87876	40000	127876
2030	96664	40000	136664
2031	106330	40000	146330
2032	116963	40000	156963
2033	128659	40000	168659
2034	141525	40000	181525
2035	155678	40000	195678
2036	171245	40000	211245

Average SIP would be worth Rs 1,24,814
CAGR would be 18% over 20 years (Quite possible as Birla Sun Life Mid Cap Fund has delivered close to Rs 24% during a 20 year old period)
The corpus would be worth Rs 29 Crores.

Over 20 years, Networth in the case of Scenario A = Rs 27.56 Crores

Over 20 years, Networth in the case of Scenario B =.Rs 29 Crores

Now let us look at what will happen over a 30 year period in the case of Scenario A.

Year	SIP/month
2017	28000
2018	30800
2019	33880
2020	37268
2021	40995
2022	45094
2023	49604
2024	54564
2025	60020
2026	66023
2027	72625
2028	79887
2029	87876
2030	96664
2031	106330
2032	116963
2033	128659
2034	141525
2035	155678
2036	171245
2037	188370
2038	207207
2039	227928
2040	250720
2041	275793
2042	303372
2043	333709
2044	367080
2045	403788
2046	444167

In 2046 Dec, the home loan would have been paid for.
At a very optimistic growth of 15%, the flat would be worth Rs 64 crores.
Average SIP would be worth Rs 1,53,527
Mutual Fund corpus would be worth Rs 107 Crores.
Total networth = Rs 64 Cr + Rs 107 Cr = Rs 171 Cr.

Now let us look at what will happen over a 30 year period in the case of Scenario B.

Year	SIP/month	SIP/month	Total
2017	28000	40000	68000
2018	30800	40000	70800
2019	33880	40000	73880
2020	37268	40000	77268
2021	40995	40000	80995
2022	45094	40000	85094
2023	49604	40000	89604
2024	54564	40000	94564
2025	60020	40000	100020
2026	66023	40000	106023
2027	72625	40000	112625
2028	79887	40000	119887
2029	87876	40000	127876
2030	96664	40000	136664
2031	106330	40000	146330
2032	116963	40000	156963
2033	128659	40000	168659
2034	141525	40000	181525
2035	155678	40000	195678
2036	171245	40000	211245
2037	188370	40000	228370
2038	207207	40000	247207
2039	227928	40000	267928
2040	250720	40000	290720
2041	275793	40000	315793
2042	303372	40000	343372
2043	333709	40000	373709
2044	367080	40000	407080
2045	403788	40000	443788
2046	444167	40000	484167

Average SIP would be worth Rs 1,93,528
CAGR would be 18% over 30 years.
The corpus would be worth Rs 277 Crores.

Over 30 years, Networth in the case of Scenario A = Rs 171 Crores

Over 30 years, Networth in the case of Scenario B =.Rs 277 Crores

A GRAND DIFFERENCE OF MORE THAN RS 100 CRORES

So what would you like to do? Rent or buy?

Personal Finance Guides

Friday, 30 December 2016

Being Employed Is a Fulfilment

Tuesday, 27 December 2016

Buying a house V/s Renting a house - The difference can cost you Rs 100 Crores!