The real cost…

Costing is a difficult subject. It is difficult not only when you are a student (ask anybody who has passed CA in the ’80s) but also in real life. However it can at least be attempted. However benefits are far more difficult to quantify. When people ask me what is the cost of term life insurance for a 30 year old for 35 years for sum assured say Rs. 2 crores, my question is “Pray tell me what is the ‘cost’ of your dependents not having any fall back support”. For me that is an important question because if a person has not thought about what will happen to his family (or not quantified it) he may not appreciate the cost figure. All numbers can be made to look big or small – like the story of 2 lines.

When a friend called me saying “I am planning to buy a house for Rs. 60 lakhs, should I buy it?”. I asked him what was the cost of the house. He said Rs. 60 L, I just told you. I asked him again. He grew silent. Then I said “If the cost of the house is equal to the amounts paid, then the cost is EMI * No. of months. In this case it was working out to 75,000 (emi) * 240 months = Rs. 180 lakhs, not 60 lakhs.

This calculation of course ignores the time value of money – but given maintenance costs, painting…and other costs, real estate cannot give great returns.

we will do some more costing articles in later posts…

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One Response to “The real cost…”

  1. What i could see from all this articles is that, nobody wants to take risk and put hard efforts, but only to save money. If you ask CA , he will answer only on money, he does not have taste on having house, car or whatever to be enjoyed in the life.always remember , in india, people give advise differently to other , as though they are honest and truthful , but they give different advice to people within the family , near’s and dear’s.

    if somebody says “Rent is better than Buying” , that is good. you are indirectly saying having house is better,cause whoever owing the house , can rent it for higher cost , as the trend will be renting than buying. now tell me who is the smarter?

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