Middle-Class Trap: 4 Mistakes That Keep You From Becoming Wealthy!

Are home loans, car loans, credit card debts, and low-income endowment policies the reason you’re still forced to work after retirement?

Have you considered how these financial mistakes could affect your post-retirement life? Isn’t it time to rethink your financial strategies and plan for a future where you’re not tied down by debt?

Many middle-class families today find themselves stuck in the same financial situation, unable to move to the next level in life.

The primary financial traps include excessive home loans, car loans, credit card debts, and low-return investment policies like endowment plans. These commitments can strain finances, making it difficult to save or invest for the future.

What are the key mistakes holding them back? And more importantly, what can you do to avoid these pitfalls and make progress toward a wealthier future? Let’s explore these four critical mistakes and how you can overcome them to achieve financial success.

Table of Contents:

1. Home Loan: The Monthly Installment Struggle
2. Car on Loan
3. Endowment Life Insurance
4. Credit Card Debt
5. Working After Retirement
6. What Should Be Done?
7. Home Loan: Is the Tax Benefit Always Beneficial?
8. Final Takeaway

1. Home Loan: The Monthly Installment Struggle

Why do so many people end up buying homes on loans as soon as they start working? Is it the desire for status, tax benefits, or the pressure of seeing others purchase homes?

Whatever the reason, many opt for home loans, often taking loans even for the down payment. But the problem arises when, by the time they’re ready to pay off the loan, retirement is already upon them.

Let’s take an example.

Suppose someone buys a ₹55 lakh house on the outskirts of Chennai. They pay ₹15 lakh as a down payment and take a ₹40 lakh loan with a 9% interest rate over 20 years.

Their monthly EMI will be around ₹40,000. Over 20 years, they will end up paying approximately ₹86 lakh, with ₹46 lakh as interest alone.

What happens when interest rates rise? If rates increase to 10%, 10.5%, or even 11%, the EMI could skyrocket, and the repayment period could extend beyond 25 years. To complete the loan in 20 years, they would need to increase the monthly payments.

Now, in today’s market, a ₹55 lakh home in cities like Chennai or Coimbatore is likely to be found in the suburbs, and even there, prices could be ₹70-75 lakh. In such cases, the monthly EMI could rise to ₹50,000-₹55,000, which creates significant financial pressure for many families.

With higher loan interest rates and delayed payments, many find themselves still paying off home loans after retirement.

How can someone achieve financial freedom when they’re burdened with debt after retirement? How do you break free from this cycle and secure your financial future?

2. Car on Loan

Why do so many people rush to buy a car by the age of 25 or 30? Is it the desire to flaunt their status or the feeling of necessity? Whatever the reason, many choose to buy a car on loan.

Let’s assume the car costs ₹12 lakh, and the loan is ₹10 lakh, with an 8-year tenure and an interest rate of 10.5%. The monthly EMI would be ₹15,440. On top of this, there are additional expenses like insurance, maintenance, and fuel, which can add another ₹8,000-₹10,000 per month.

Now, imagine if the loan is taken with fluctuating interest rates. If the interest rate increases, the monthly EMI would rise, forcing you to either increase your payments or extend the loan period.

But what happens when you’re left with no funds for crucial investments? Wouldn’t it be more beneficial to reconsider such a financial burden? How can you plan for long-term wealth creation when immediate expenses like car loans dominate your finances?

3. Endowment Life Insurance

One common practice we see is purchasing endowment life insurance policies as a means of saving for the future. People often invest large sums into these policies.

However, what if you knew that these policies offer low coverage and provide a return of only around 5%-6% per year? The premiums, on the other hand, are quite high. So, are you really getting value for money?

While you’re paying significant amounts, the returns are minimal. Wouldn’t it be wiser to consider alternative investment options that offer higher returns with lower costs? How long will this pattern of high premiums and low benefits continue to make sense for you?

4. Credit Card Debt

With a credit card, you get the convenience of purchasing items without paying interest for up to 50 days. It allows you to buy what you need at the moment, often branded items at discounted prices, with no immediate interest charges.

So, it seems like an attractive option, right? But how often do we find ourselves buying more than we intended? For instance, someone might plan to buy a ₹30,000 smartphone but end up purchasing a ₹50,000 model instead.

And it doesn’t stop there; once you start buying one desired item, the temptation to buy more grows. Is this really the best financial choice?

With interest rates ranging from 36%-45% annually, along with late payment fees, compounded interest, and penalties, are we not digging ourselves deeper into debt? How sustainable is this lifestyle in the long run?

Develop disciplined saving and investing habits. Rather than relying on loans for non-essential items like cars and luxury goods, consider renting or buying within means.

Prioritize investing in high-return options like equity mutual funds, build an emergency fund, and avoid high-interest debts like credit cards.

Working After Retirement

How many of us find ourselves still working after retirement? The root cause often lies in mistakes like home loans, car loans, credit card debts, and low-return endowment policies.

These financial burdens trap individuals into continuing to work even after they’ve reached retirement age. Isn’t it true that debt has become a form of financial slavery in independent India?

With salaries barely enough to cover loan EMIs, how can one save for their children’s higher education? Instead of building a future, many are forced to take education loans. Isn’t this cycle worth questioning?

What Should Be Done?

How can we achieve our financial goals if we keep making mistakes like buying homes, cars, or getting into credit card debt and endowment policies?

The key to financial freedom lies in avoiding these traps. Instead of committing to a ₹40,000 monthly EMI for a ₹55 lakh home, why not rent a house for ₹12,000 – ₹15,000 a month during the initial years?

Similarly, why buy a car on loan when you can rent one when needed? How often have we seen transportation costs shoot up from ₹200 to ₹1,000 just because we thought buying a car was a necessity?

Moreover, why settle for high-premium endowment policies when you can invest in a term life insurance policy with lower premiums but higher coverage? The extra money saved can be invested for substantial returns.

And isn’t it true that avoiding credit cards altogether could eliminate financial stress?

Rather than rushing into loans right after securing a job, what if we start investing 30-50% of our salary in equity mutual funds from day one?

By doing so, it’s entirely possible to achieve financial independence by 55. Then, you can decide to purchase a house or a car based on your needs.

As Steve Jobs famously said,

“Being born poor is not your fault, but dying poor is.” 

Isn’t it time to shift from middle class to wealthier? Let’s start this journey toward financial freedom today!

Home Loan: Is the Tax Benefit Always Beneficial?

Under the old tax regime, home loans come with certain tax benefits. You can claim up to ₹1.5 lakh under Section 80C for repaying the principal of the loan within the financial year.

Additionally, under Section 24, you can claim up to ₹2 lakh as tax benefits for interest paid on the home loan. Whether you live in the house or rent it out, these benefits are applicable in the old tax regime.

However, in the new tax regime, if the house is rented out and the rental income is declared, the benefit under Section 24 (interest on the home loan) is still available, but only up to ₹2 lakh.

The benefit under Section 80C, which allows a ₹1.5 lakh deduction for principal repayment, is no longer available.

In the old tax regime, under Section 80C, the ₹1.5 lakh benefit also includes various investments like EPF, VPF, PPF, life insurance premiums, children’s school and college fees, ELSS mutual fund investments, five-year bank fixed deposits, and National Savings Certificates.

As someone’s salary increases, they may end up contributing more to their EPF, but if they also pay life insurance premiums, the tax benefit on principal repayment may diminish.

Even if the home loan repayment exceeds ₹1.5 lakh in a financial year, only a smaller benefit is available. For those with higher educational expenses and insurance premiums, the benefits may be non-existent.

Also, with home loans, during the initial years, the interest portion is higher, leading to a larger portion of the EMI being paid towards interest. As the loan principal decreases, the interest payment decreases as well.

During this phase, the old tax regime might not be as beneficial, as the tax benefit on interest is smaller. With a lower tax rate in the new regime, it might actually be more beneficial.

Moreover, many people who buy homes with loans end up renting out the property for various reasons.

In such cases, especially for higher earners, the new tax regime becomes more advantageous as they can declare the rental income and still claim benefits on the interest paid.

But if the annual rent is ₹2.5 lakh, the interest benefit of ₹2 lakh may not cover the entire benefit. Therefore, it’s not always accurate to say that home loan tax benefits will always be advantageous.

Wouldn’t it make sense to carefully evaluate both tax regimes before deciding which one truly benefits your situation?

Final Takeaway

• Make informed financial decisions to avoid debt traps like home loans, car loans, and low-return policies.
• Consider alternative investment strategies, like equity mutual funds, for long-term wealth creation.
• Start investing early to achieve financial freedom and security.
• Reevaluate your financial habits to prioritize growth over short-term satisfaction.

To avoid the middle-class trap, focus on building wealth through smart financial decisions. Avoid taking on excessive debt like home loans and car loans, and instead, prioritize saving and investing in higher-return options like equity mutual funds.

Starting early, making informed choices, and focusing on long-term financial growth rather than short-term expenses is key.