Have you ever wondered while planning for your future as to why certain assets evoke so much loyalty and attachment? Come to think of it, you may have invested in them dispassionately in pursuit of good returns, but somewhere along the way they may have acquired a persona of their own.
Assets with emotional connect
Real estate and gold are two such assets that have a huge emotional connect. Gold is understandable as, in our culture, if you are sell physical gold, people assume that you face really hard times. Other forms of gold such as Gold ETFs, luckily, are easier to deal with.
But what about real estate? Let me recount a couple of interactions we had in the past few months. One of them was with a woman in her late 30s and has been investing for the last couple of years. The objective initially was to buy a house. When we discussed this further, she agreed that her family already owned a lovely house where they currently resided and she was very happy with the location, size, amenities etc. She could not see herself moving into a much smaller house (which is what she could afford even after stretching her budget). But the idea of owning the house appealed to her. We pointed out that having a sizeable corpus to retire with could give her a sense of independence and achievement. She was initially hesitant, but could eventually see the merit in the suggestion that having a cubbyhole in a corner of the city and depending on it for her sunset years was not a good idea.
Once she accepted the counsel, she implemented her plan to the T. She started saving diligently for the future and increased the amount on a yearly basis. She kept track of her expenses and was generally at peace. In about two years, she had managed to save a decent corpus; that’s when things stated to change. Suddenly, all the housing ads started looking very appealing to her and she was confident of having saved enough for the down payment. She wanted to buy a house which was one-sixth the size of her current family home. She knew that she would never live in the house. The apartment she was considering was a pre-launch project and had a few years to go before seeing the light of day.
We discussed all of this and the fact that her ability to save would be seriously compromised if she were to take a home loan. It would mean that she would be left with a house (if and when it fructifies) and nothing else for her retirement. Despite acknowledging all of this, she went ahead and invested her entire savings to-date as the down-payment and is gearing up to pay her EMI. A little taken aback by this decision of a normally logical and amenable-to-advice person, I asked her what was it about the house that made is such a compelling proposition. She said “that is the only thing which can give me a sense of accomplishment that I so crave for; it is like a pat on the back that I could manage it all by myself.”
Delaying retirement saving
The other was a couple into its early 40s. The couple had a teenaged son and was taking care of a parent who has been unwell and bed-ridden for a couple of years now. While they had a plan in place for the son’s education, they had none for their retirement. Every time we discussed it, they were of the opinion that they could barely make ends meet with the escalating cost of care for an elderly person and were looking forward to starting on their retirement funding as soon as things settled down and there was a substantial hike in salary.
The promotion and hike in salary came through immediately, followed by a job change. Things were looking comfortable. This is when they decided to upgrade their house from a two bedroom place to a three bedroom one. We had the same discussion again on the need for financial assets to take care of their looming retirement. They seemed to believe that it will magically take care of itself. We pointed out that in a few years their son would move away for higher education and both father and the in-laws may not be around for too many years. They politely heard us out, but we knew the battle was lost. They had made up their minds on a large house and both of them visibly light up at the very mention of the house. They are actively looking out for their dream home.
Differential treatment for financial assets
I cannot think of too many people putting their life savings into a financial asset and staying the course despite hiccups and abysmal returns. Why then is real estate treated differently? It is important to be dispassionate and consider all pros and cons when making such crucial financial decisions. It is time people woke up to the fact that buying the dream home at the cost of other important primary goals such as retirement is not something that can be undone easily. It may be time to take the rose-tinted glasses off when you evaluate your next house and look at it objectively without any emotional baggage.
(The writer is a Certified Financial Planner and Founder of Finwise Personal Finance Solutions)