This is Part 6 of a continuing 12-part series on financial planning. Adam and Aida just got back from their honeymoon and they had a really good break. This week, we will be looking at how Adam and Aida manage their finances as a couple and specifically, on the issue of home ownership.
It is important for couples to have heart-to-heart talks on each other’s expectations and see eye-to-eye on money matters. Newlyweds should consider the pointers below:
- Involve your spouse in the financial plan.
- Decide on how to handle routine/utility bills and household budgeting.
- Advisable to have at least three bank accounts – “My Account”, “Your Account” and “Our Account” (shared account to meet common expenses)
- As a couple, keep aside an emergency fund for unexpected expenses
- Talk about each other’s investment style and preference. Have a common investment portfolio to meet future financial goals, such as retiring comfortably and children’s education expenses
- Review your insurance coverage. With dependence, we will most likely need to increase our coverage.
After considering the above points, Adam and Aida drew up their joint family budget.
From their budget, Adam and Aida have a healthy surplus of RM3000 per month arising from their agreement of owning only one car and staying with Adam’s parents. They were able to save quite a lot as a result of their financial discipline.
(Net of EPF, SOCSO and tax)
|Life Insurance Premium
|Repayment of PTPTN Loan||300|
|Car Instalment – Adam||400|
|Gift to Parents (Both)||1,000|
|Petrol & Toll||400|
|Car Maintenance, Road Tax & Insurance||200|
|Clothing & Entertainment||400|
|Total Income||8,000||Total Expenses||5,000|
|Balance of Income||3,000|
As a rule of thumb, we can safely allocate up to one-third of our monthly take-home pay towards all our loan commitments. As Adam and Aida are currently paying off their PTPTN loans and Adam’s car instalment, that leaves them with about RM2000 for their home instalment. With a loan tenure of 30 years and an assumed average interest rate of 5% p.a., they should limit their home loan to approximately RM370,000. However, they should also have about 10% cash for down payment and another 5%, more or less, for other incidental costs such as stamp duties and legal fees. With this in mind, they set their goal to save for this purpose for the next one year or so and until then, they will start looking around for their dream home.
There are two good reasons why Adam and Aida felt that buying their own home is preferred than to rent one. Firstly, by buying a home, they will be able increase their net worth over time while servicing their loan because the value of the house generally increases while the loan amount reduces. Secondly, owning one’s own home brings about a sense of pride, security and accomplishment in having a permanent roof over their head.
However, before buying a house, you should do your homework! The golden rule of any property investment is: location, location and location! Consider the following additional tips:
- Drive around the neighbourhood at different times of the day and week to see how your potential neighbours are like.
- Check the infrastructures or facilities in the area that can add value to the house, such as schools, shops, park / playground, public transport and surrounding businesses. Watch out also for present conditions and/or any future development that may make the area economically disadvantaged.
- Check if the property is located on freehold or leasehold land. The market value of a house on freehold land is usually higher than leasehold land. However, the preference is subjective to an individual.
- Talk to property experts for sound advice about the property market, suitable locations or types of properties.
- Shop around for the best possible home loan package. Beside interest rates, understand the terms and conditions of the loan, which should be pertinent and flexible enough to suit your needs.
Remember…..You must be able to afford to buy and pay for your house. Otherwise, your dream home will turn into a financial nightmare!