How to Manage your Debts Better

All in all, there is no end to a person’s needs today. This is one of the main reasons for the confinement of an individual in the chains of “financial slavery”. But did you know that with a little bit of planning and a judicious choice of financing options, you can actually lead a loan-free retirement life? Let us take a look at this in detail.

Understanding debts

Bad loans - If you purchase a depreciating asset through a loan, then that debt is referred to as a bad loan. This is because you can never really recover the amount you paid for that purchase. You also pay an interest on the debt, and this amplifies the loss. Examples of bad loans are credit card debts, consumer durable loan, etc. A bad loan only gives you a feeling of living a rich life, but in reality, you do not benefit all that much from the debt.

Good loans - If you finance the purchase of a product that enhances in value over time and provides you a good return (over and above the interest paid), then you are in possession of a good loan. Examples of good debts are personal loans for education and home loans.

A house always appreciates in value; so if you buy one with proper research and assessment, you can easily recover the cost price and the interest paid on the home loan. You should also remember that not many people incur true losses while selling their property.

Similarly, an education loan enriches your knowledge and helps you land a well-paying job. This is, hence, an investment that provides lifelong returns.

So ideally, you should stay away from taking bad loans that can eat into your net income each month. Good loans are not as damaging as bad debts, and these can also improve your credit score.

Change your spending habits

One of the most optimum ways in which you can bring down your debts is by spending wisely. Here is a checklist that helps you reduce your monthly expenses:

Consolidate your loans

A balance transfer implies that you will be consolidating your credit card dues and paying it off with a personal loan at a lower interest rate. Although this does not make you completely debt-free, you will save a substantial amount on interest. One of the key benefits of using this facility is that such a transfer of credit reflects positively on your credit report. Transferring your debts to a low interest personal loan indicates that you are capable of handling credit efficiently. But you should get a clear idea of the terms and conditions involved in the balance transfer process and plan accordingly.

Save for fulfilling goals

Once you have control over the debt monster, you should start saving for your future goals. This can be in the form of investments that grow your money through the power of compounding. It is also wise to get a mediclaim policy that offers you financial assistance in the unprecedented event of a hospitalisation. You should note that getting health insurance is a great way to save on tax as well.

Apart from the tips mentioned above, you should always set aside an emergency fund that can sustain your family for a year in a dire situation. Without doubt, managing loans involves a fair amount of sacrifice and the willingness to stay focussed on saving for a long duration. But rest assured that going off the beaten path can provide you a loan-free retirement life with complete peace of mind.