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Buying a home? Why personal finance matters

Buying a home is perhaps the biggest life and personal finance decision to be made by a family, yet we often take that decision based on here say, emotions, past performance metrics that are thrown at us and zealous real estate developers who claim to increase the price every other day, creating a false sense of urgency and artificial demand.

The great Indian dream, owning a home, is an aspiration of almost everyone in the country. However, the impact on personal finances for going after this dream could have substantial negative down side. While, renting home is not always considered an aspiration, the positive impacts on personal finance are significant. A typical middle class family always wrestles with the thought of buying home vs. renting a home.

Be it a first time home buyer or a home buyer who is looking to move up to the next big home, factors that often influence our decisions could be unrealistic in nature. But these are prevalent among the majority of the population. Renting a home or buying it has their share of advantages and disadvantages.

Renting a home is always considered an expense in our households. While, buying a home is considered to be an investment into an asset that could provide significant returns, perhaps at levels greater than any other asset class such as equity or fixed income.

Additionally, there has always been the social pressure on the middle class to be an owner rather than a renter. Buying a home is considered, a ticket to a superior standing in the social circles. Our physiological behavior patterns give us a sense of security, when we own a home. On the other and, renting home is still considered an option for the segment of people who have not made it yet.

The decisions made on the basis of the above mentioned factors can often lead a family into a path of financial misery. The common problems we come across today include, buying a home that was out of reach, stretching finances to meet down payments, losing money in buying home too early, not preparing personal finances for the new outflows, not preparing for emergencies etc. These mistakes could have a lasting impact on the economic future of the family and hit specific and important goals such as child’s education, retirement planning, marriage of child, living a set lifestyle etc. This problem is exasperated in the section of the population which constitute the "first time home buyers", who probably aspire to move from a rented home to an own home.

Buying a home is perhaps the biggest life and personal finance decision to be made by a family, yet we often take that decision based on here say, emotions, past performance metrics that are thrown at us and zealous real estate developers who claim to increase the price every other day, creating a false sense of urgency and artificial demand.

It is essential that buying a home v/s renting a home decision be taken objectively based on the personal finances of the individual or the family, cost of buying, cost of renting, city of stay, duration of stay and willingness to move to another city. While, emotional satisfaction is important, it cannot be allowed to cloud better judgment.

ArthaYantra addressed the issue of Buy vs Rent objectively, by introducing ArthaYantra Buy vs Rent Score (ABRS). Before making a decision, know your ABRS to know the impact on your finances.

Authored by ArthaYantra.com, an integrated online personal finance company.

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