High interest debts are the worst debts, clearing them should be the first priority. Generally credit card loans, or personal loans carry heavy interest rate, therefore, targeting them first will make sense.
Today’s generation is all about the so called ‘SWAG’ lifestyle, where patience is minimum and hustle-bustle is maximum. This swag lifestyle can make you end up with long credit card bills, heavy interest ridden debt, high EMIs and low or no cash reserves, now that is not so swag-gy isn’t it?
Is there a solution to this? Answer is yes, but the solution, like medicines, is very bitter at first but heaven once its start making its role known. Let us check out the step by step ways to bring the solution to work.
Cut the Swipe-off
You know what I mean? Yes, stop using the plastic tumor aka credit cards. Credit cards are too good to resist when it comes to no cash availability. However, one forgets that the credit period lasts only 45 days thereafter the whole amount is charged at an exorbitant interest rates (around 36% per annum).
In addition, you need to arrange the money spent along with your daily chores, like rent, bills, etc. There can be chaos in your financial planning by one bad unplanned swipe. Hence, the best option is to put a stop to this tumour and start saving for buying stuff. Borrowing more when already debt ridden, won’t help, hence step one is always stop spending through credit cards.
Speaking of practicality, let us assume you have a credit with credit limit of 1 lakh rupees and the interest will be charged until you pay the entire amount post the due date. In addition to that you will have to arrange extra money to repay the excess bill along with your fixed expenses.
Cut-down on expenses
No need to starve, but eating at home, or affordable hygienic places, can help. Everyone has one of those expenses, which we always feel are not obvious. Cutting down on these unnecessary expenses will not only help save some extra buck but also bring in a healthy financial habit. These savings can help you reduce your debt burden in addition to that reduce your debt by unnecessary spending.
For instance, your income is Rs 50,000 and after getting rid of all your fixed expenses and loan EMIs, you arrive at a balance of Rs 10,000. Here onwards, if you try and save least Rs 3,000-5,000 by reducing on unnecessary expenses, you not only will help in building liquidity for next month, but also avoid borrowings in case of exhaustion of the entire Rs 10,000 before the arrival of your next income.
Heavy Targets First
High interest debts are the worst debts, clearing them should be the first priority. List down all the loans you have and target to clear the heavy interest ridden debts. Generally credit card loans, or personal loans carry heavy interest rate, therefore targeting them first will make sense.
Auto loans or home loans can be restructured by consulting the respective banks, thus changing the EMI figure can be helpful. How does this works in real life, let us check.
Considering you have a personal loan charging interest at 17% per annum. Now there are two ways to restructure your loan. Number 1 approach a bank offering lower interest rate (assuming you have completed six months loan tenure) you will not require any documentation on the basis of credit report that your second bank will fall back on.
With the new loan amount, you can retire the old- albeit more expensive- loan and start servicing the new loan. Saving on the interest will help you reduce the entire outflow at the end of tenure plus EMI amount will be reduced considerably.
Number 2 option is borrowing money from friends and relatives at lower or zero interest rate and repaying the debts. This is a dicey option, depending upon your credibility and financial condition of family, however, you save the entire interest on loan nonetheless.
Not in the gym, but in your financial life, some part-time work or extra shift could do no harm for your debts. In case of heavy debt burden, this is one of the most painful yet most helpful cures to your debt illness. One, it helps you to earn extra cash, and two it keeps you occupied thus stops you from spending money. Who doesn’t like extra money?
Let us say a part time job lets you earn Rs 5,000 per month. Now your debts can be financed by your fixed income, and this extra earnings can let you enjoy those sunny weekends at ease without borrowing or letting your credit card bills comparable to Mt Everest. In addition, flexing this extra muscle can help you build a fund to use for emergency.Avoid haste, Trust in Savings
Big Billion Days or Great Indian Sale are always very tempting, but as far as your financial budget is concerned, they are not so tempting. Purchasing anything in haste or unplanned way can be very dangerous. Instead if the purchases are planned, not only the debts are taken care of but also you save on unnecessary debts and its interest. An iPhone looks good isn’t it? But does buying it on EMI make sense when you are already debt ridden?
The answer is no. Since your budget is heavily or rather overfilled by debt, this extra EMI can hurt too bad. Instead to purchase an iPhone of Rs 50,000 instead of paying EMI, saving of Rs 5,000 every month can help you achieve your dream in less than 12 months.
Barring emergency situation which may strike anytime, this will be a much smoother ride, and worst case scenario even if an emergency arrives, you will be ready for it and not injured with debt. Since you can utilize those savings and restart it, but in case you approach the EMI mechanism, you do not have any savings plus you will need to borrow extra money and make another unwanted EMI friend for it.(The author is a financial planner and founder of Money Mantra.)Subscribe to Moneycontrol Pro and gain access to curated markets data, exclusive trading recommendations, independent equity analysis, actionable investment ideas, nuanced takes on macro, corporate and policy actions, practical insights from market gurus and much more.