Let Your SIP Fight Your EMI

When Ramesh bought his first home, he was delighted. The keys were finally in his hand, but another number immediately occupied his mind: the monthly EMI. “Now that I have some money left after paying my EMI, what should I do with it?” he asked his financial adviser. “Or should I start investing? And if I invest, won’t I be carrying a loan unnecessarily?” A home loan can run for 15, 20 or even 25 years, while the desire to become debt-free keeps growing. But does a borrower necessarily have...

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When Ramesh bought his first home, he was delighted. The keys were finally in his hand, but another number immediately occupied his mind: the monthly EMI. “Now that I have some money left after paying my EMI, what should I do with it?” he asked his financial adviser. “Or should I start investing? And if I invest, won’t I be carrying a loan unnecessarily?” A home loan can run for 15, 20 or even 25 years, while the desire to become debt-free keeps growing. But does a borrower necessarily have to choose between repaying the loan faster and investing for the future? What if both could be pursued simultaneously? Could a Systematic Investment Plan (SIP) create a corpus that eventually helps reduce or even close the home loan? The idea merits consideration. A SIP is not a magic formula for becoming debt-free, but it can create a second financial track alongside the regular EMI. Two tracks, one objective Consider an illustration. Suppose a borrower takes a home loan of ₹50 lakh at an assumed interest rate of 8.5 pc for 20 years. The EMI would be around ₹43,400.
Instead of putting every available rupee into the loan, the borrower could consider investing ₹10,000 a month through a SIP, provided the household cash flow permits it. At an assumed annualised return of 12 pc, a ₹10,000 monthly SIP could grow to roughly ₹8.24 lakh in five years, ₹23.23 lakh in 10 years, ₹32.22 lakh in 12 years and ₹50.45 lakh in 15 years. While these are not guaranteed returns, the possibility of higher returns is also not ruled out. Meanwhile, the outstanding home loan would gradually decline through EMIs. Over eight to 10 years, the SIP corpus could become substantial enough to give the borrower an additional financial option. The important point is not to decide today exactly when the loan will be closed, but to review the position when the time comes. Why not simply prepay? Prepaying the home loan provides a relatively certain benefit because every rupee of principal repaid reduces future interest outgo, subject to the loan terms and applicable rules. The SIP serves a different purpose. It creates a financial asset and, over the long term, gives the investor an opportunity to participate in the growth potential of financial markets. The decision point comes later The strategy need not have a fixed finish line. After eight to 10 years, the borrower can review the situation rather than mechanically redeeming the SIP. What is the outstanding loan, the investment value and its performance? What are the prevailing market conditions? Is part-prepayment more appropriate than full repayment? These questions can guide the decision. If the corpus has grown sufficiently and circumstances are favourable, the borrower may consider using part of it to reduce the outstanding loan or, if appropriate, redeeming enough to close the loan completely. If the investment is better retained for the long term, there is no compulsion to exit merely because 10 years have passed. The strength of the strategy lies in this flexibility. Think beyond the loan A long-term SIP is not merely a future home-loan repayment fund. It can become a wealth-creation vehicle in its own right. Compounding rewards patience. A disciplined monthly investment held for the long term can help build a corpus for retirement, children’s education, other life goals or financial independence. Thus, while the home loan moves towards closure through the EMI, the investment has the opportunity to grow alongside it. Once the loan is eventually closed, the EMI disappears. Instead of allowing that money to quietly disappear into lifestyle expenses, the borrower can redirect some or all of the former EMI towards investments. A sensible balance This approach is not a universal prescription. Some borrowers may prefer aggressive loan prepayment, while others may find the combination of EMI and SIP more suitable. The SIP amount should also be comfortable. If ₹10,000 strains the monthly budget, start with less. The strategy should strengthen financial security, not create financial pressure. Adequate emergency savings and appropriate insurance should also form part of the overall financial plan. The larger lesson is simple: a home loan need not automatically put wealth creation on hold. With disciplined cash-flow management, a long-term investment approach and periodic reviews, the EMI can continue paying for today’s home while the SIP works towards tomorrow’s financial freedom. In the end, the question need not be, “Loan or investment?” It can be: “How can I use both wisely?” Disclaimer: “Mutual funds are subject to market risks. Read all scheme-related documents carefully.” (The writer is a retired banker and author. Views personal.)

The Three Bucket Rule

Kaustubh Kale

Mar 21

2 min read

As we start the new financial year, this is a good time to pause and look at how your monthly income is being used. Let me try and help you rationalise your expenses, EMIs, and savings in a simple and practical manner. If you do not consciously divide your income, it quietly disappears into expenses, EMIs, and lifestyle leakages. The solution is simple: divide your monthly income into three buckets.

The three-bucket approach

For ease of understanding, think of these as three roughly equal parts of one-third each. This may not be mathematically perfect for every person, but it is a very practical framework that creates discipline and clarity in money management.

Bucket 1: Monthly expenses

This includes routine household expenses, bills, groceries, fuel, dining out, lifestyle spending, and other regular outflows. In short, this bucket is meant for your present life and present needs. Ideally, you should try to restrict these expenses to one-third of your monthly income.

Bucket 2: Loan repayments and EMIs

This includes home loans, car loans, personal loans, education loans, and even credit card dues. While debt may sometimes be necessary, it must remain within control. As a broad thumb rule, this bucket too should not exceed one-third of your monthly income. If your EMI burden regularly crosses this level, it is usually a sign that you are over-leveraged.

The more disciplined you are in Bucket 1 and 2, the more room you create for wealth creation.

Bucket 3: Investments for long-term goals

This is the bucket of delayed gratification, also something that most people neglect. Saving money is not the same as investing money. Investments should be made with the right asset allocation and with clear long-term goals in mind - children’s education, marriage, buying a dream home, a dream car, dream vacation and your retirement. These are goals that cannot usually be met from one month’s income alone. They require regular and purposeful investing.

What if you have no EMIs?

If you do not have loans or EMIs, it becomes even easier. You may be able to invest 40%, 50%, or even more of your income. That is excellent, because the more you direct towards investments, the stronger your future financial position becomes.

Use three bank accounts

A very effective way to implement this system is to maintain three separate bank accounts. The first is the Income Account, where your salary or business income is received. The second is the Expenses and EMIs Account, from which all regular spending and loan repayments are made. The third is the Investments Account, the most important one, from which long-term investments are made.

Present self vs future self

Seen differently, the Expenses Account is for your present self, while the Investments Account is for your future self. Over time, this simple habit creates clarity, discipline, and control. And that is the real goal of personal finance: to ensure that you command your money, instead of letting money rule you.

(The author is a Chartered Accountant and CFA (USA). Financial Advisor. Views personal. He could be reached on 9833133605.)

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