Portfolio

Commit to savings through real estate

B. Venkatesh | Updated on November 25, 2017 Published on January 07, 2014

With real estate, you take a loan and commit yourself to paying an EMI to prevent yourself from spending your entire monthly income.



Is real estate a good investment? Or is real estate good for you? The former focuses on returns from real estate, while the latter focuses on what real estate ownership can do to your emotional state of being. After observing the almost-compulsive urge among individuals to own a house, we realized that real estate ownership can do more good to your mental well-being than it can do to your portfolio.

Forced savings

Saving is difficult. Not because you do not earn enough, but because you have more opportunities today to spend your income. So, you should be motivated to save, or you have to force yourself to save for the future. If you are typical individual, you would force yourself to save, given the need for instant gratification.It turns out that real estate ownership helps you in forced savings. How?

Suppose social pressure and forceful nudges from your family drive you to buy a house. When you buy a house with a bank loan, you are committed to making a large payment (EMI) every month. Indeed, if you do not commit to such monthly payment, you may be otherwise tempted to spend that money on discretionary expenses such as fine dining and vacation.

In some ways, you could argue that real estate ownership is like a savings commitment device. Strictly, a commitment device is one where you lock yourself into a course of action that you may not otherwise choose, but which will help you over the longer term. Take your annual increment. Typically, an increase in income does not lead to proportionate increase in savings. And that is because you may consciously or otherwise increase your living expenses. You can, however, create a commitment device to forcefully increase your savings every year, by asking your employer today to take 15 per cent of your annual increment starting next year and investing the amount in your provident fund account.

Giving satisfaction

In the case of real estate, you take a loan and commit yourself to paying an EMI to prevent yourself from spending your entire monthly income. And EMI helps you in building your equity in the house. But why real estate, you may ask?

After all, a systematic investment plan on an equity mutual fund would qualify as a commitment device. And indeed, that would be our first choice. But what if you are not inclined to investing in equity funds?

After all, with the social and family pressure to own a house, you will be more predisposed to buying real estate than investing in equity funds. Besides, real estate ownership can create wealth and give you mental satisfaction.



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