Khota Paisa

How Much EMI Should You Afford?

Posted in General by khotapaisa on August 29, 2009

Not so long ago, a friend of mine bought a house. The EMI for his house comes to about 50% of his take-home salary. Now let us try to see how affordable this EMI is for him. Though I don’t have details of his expenses, I would try to list the mandatory monthly expenses conservatively.

EMI : 55000/-
Household expense : 25-30000/-
School : 3-5000/-
Saving for child education : 6-9000/-
Saving towards retirement : 25,000/- minimum

So he needs between 59,000 to 68,000/- every month towards his expenses. Remember that it doesn’t include other discretionary expenses, travel etc. It means that he is already falling short of money. So, how would he be managing it? Well, I can tell you that there are only two expenses he can cut corner into. One is the saving for child education and the other is the saving towards retirement. I can bet that the retirement quota is being used to manage the cash flow.
This situation is not uncommon now a days. Every other person (at least in my industry) has moderate to high levels of loans, sometimes more than one. They seem to afford it not because they are earning enough to afford it. They afford it because they compromise on one or more future goals (mostly retirement). Somehow people tend to think that over the next 20 or 30 years, they will earn/get a lot of money to fund their retirement. They might get it but not for sure. In fact retirement is the only financial goal that is non-negotiable. If you can’t save money for your kid’s education or marriage, you can still finance it by taking loan. Though this is not a good situation to be in, you at least have an option. But if you don’t save money towards your retirement, there is no option of loan. It might seem offending but your retirement is more important (or let’s say non-negotiable) that any other goal like house, higher education, marriage etc.

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