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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