You took a Home Loan 15 years back. Back then, it was a huge amount and was taking up close to 50% of your take-home pay. But now it seems like peanuts. So, you used all your bonuses and pay hikes to close your Home Loan. Thanks to that, you have plenty of surplus right now. What should you do with all that money? Splurge? Nah! That’s the worst thing to do. Now that you have (possibly) the biggest debt out of the way, you should look at your finances and revisit your financial plan. Here’s what you should do.
Check the surplus
When you close a loan with a huge interest rate, you will have plenty of surplus in hand. Revisit your monthly budgets of the past and check how much surplus you are now having in hand every month as opposed to when you were paying the loan. If you want to use the surplus for indulgences, make a reasonable budget and finish making those purchases. When such expenses are out of the way, you will have a clear picture of how much you can save every month.
Pay off other debts
Check if you have other small loans. You can aim to pay them off with your new surplus. This will help ensure that you have even more surplus as you go along. Start with the most expensive loan and pay off your loans one by one. When you have no loans, you will have more money to spend, save, and invest.
Additional Reading: Your Proven Home Loan Eligibility Checklist
Revisit your financial plan
You should be going back and revising your financial plan to reflect the changes in your financial position. How will paying off loans change your net worth position? How will this change your savings for goals? Will you be able to reach some goals earlier now that you have more money on hand? Will you be adding new goals because of your surplus? These are some of the points that you need to ponder on and make changes to your financial plan. Consider this: If you were saving for a car down-payment and had Rs. 1 lakh in hand, you will need 3 years to reach Rs. 2 lakh if you saved Rs. 2000 per month (at 9% interest). If you increase this contribution to Rs. 4000 per month, you can reach that amount within 2 years.
Additional reading: Home Loan Handbook: All Questions Answered
Prioritise and prioritise some more
When you have a surplus in hand, prioritise your goals and allocate your savings accordingly. The goal that is close should be given top priority but don’t put in all your savings for a single goal. Always spread them across goals so that you save for all goals. And whatever your short-term goal, always keep your long-term goals in mind and ensure you allocate funds for them. These include goals such as your kid’s education and retirement. The typical mistake that many make is ignoring their long-term goals and save up for short-term goals such as a vacation or car. This is totally wrong. Here’s why. Suppose you have saved Rs. 3 lakh for your kid’s education which is 10 years away by putting aside Rs. 4000 every month. Now you have a surplus in hand. You decide to put in all your savings towards buying a car. You want to do this within 2 years. This will reduce the amount you can save for your kid’s education drastically. How? Suppose you stop investing for your kid’s education for 2 years, you will make only about Rs. 12 lakh at the end of 10 years. If you had continued investing, you would have made over Rs. 16 lakh. So, distribute your surplus accordingly.
Additional Reading: Terms For Adding Co-applicants To A Home Loan Application
Yet to prepay your Home Loan? Here’s why you should consider it.
Let us assume you have taken a Home Loan of Rs. 35 lakh for 20 years at 10% interest. Your regular EMI will be about Rs. 33, 700. Suppose you pay Rs. 10,000 extra every month (or Rs. 1,20,000 a year), you can save Rs. 23 lakh in interest! Yes, that’s right! Want another good news? You can pay off your loan in just 11 years. So, shouldn’t you be prepaying your Home Loan?
Go ahead and try to prepay your Home Loan but don’t forget to take into account the tax benefits it is giving you. Home Loan gives you the maximum tax breaks and if you are in the high-income tax bracket, you would want to retain this. Weigh the pros and cons before prepaying your Home Loan. And don’t forget to do the same when choosing a Home Loan.