Saving for a home?

We are both 27 years old.

We want to buy an apartment but have no cash for a down payment.

We have planned for a baby in next two years.

We also need to save for retirement and our child's education.

We can save Rs 600,000 per annum. How should we plan our finances?

- Subodh Taigor

Hi Subodh,

You have many choices before you. I see that as exciting, but there would be people who might view it as confusing. I believe it is better to be confused with choices than be blissfully ignorant of them.

Let me assume the budget for your home is Rs 50 lakh, of which you could borrow about Rs 35 lakh and make a down payment of Rs 15 lakh. This would include costs of the property, transfer costs, broker's commissions and all other associated expenses.

It might suit your circumstances to start looking for a home about 20 months from now.

That will allow you to accumulate some money as well as allow the property market to cool off a bit, if you too believe it is a bit hot now.

Assuming you do not have any other financial assets, the question would then be where you must save in the interim period.

I have found two years as a fairly short time horizon for equity markets. Also, seeing the current market situation, it may not be a great idea to be saving up in stocks for a time horizon of next two years.

I would suggest that you look at a fund like Benchmark Derivatives Fund which functions like a debt instrument. Also consider a floating rate fund like HDFC Floating Rate Fund – Short Term Plan (these are funds that invest in fixed return instruments where the interest rate changes with changes in the interest rate of the economy).

Both the above would benefit from interest rate hikes unlike bond funds (which are fixed return) which stand at a disadvantage in such environments.

So, all in all, it would be a fairly low risk, low return approach to accumulating the down payment. Which probably might give you the required sum in 25 to 28 months at the rate at which you have stated your expectations of saving up.

As I mentioned earlier, there is a lot you could do in terms of planning for your retirement, child's education and most importantly (life) insurance. But I find that the true pleasure is in eating the pudding. So take one step at a time and implement it.

The benefits you reap will motivate you to do more and, maybe, a few years from now, you will be in a position of financial strength, which few people enjoy.

To see the other query answered by Devang Shah, read Should spouses be equally insured?

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