PRUDENT saving and smart investing may be important for building your portfolio and creating a huge-nest egg, but assuming them to be the only keys to accumulating wealth is akin to financial hara-kiri. For, in the absence of a good debt strategy, the financial planning for your secured future can not only get topsy-turvy but awfully wobbly as well.
Debt management, in fact, assumes more importance in the light of the fact that today debt has become a way of our lives, with consumer finance schemes and credit cards becoming big drivers of this devil. Rising disposable incomes, soaring aspirations and convenience in availing credit have increased the amount of debt that an average individual is carrying. In the US, for instance, the household debt-to-income ratio is said to have reached an all-time high, topping 19%, with Americans collectively spending more than what they have earned for the past two years in a row. Likewise, the latest Grant Thornton research shows that personal debt in the UK has forged ahead of its GDP for the second year running. And, in all probability, India is also heading for a similar mess — sooner or later.
In such a scenario where delinquency rates are also increasing due to high interest rates, debt management becomes imperative. Also, because every year lakhs of people spend thousands of rupees only as interest on various loans taken by them. Therefore, following a prudent approach in managing one’s debt can go a long way in saving this money and thereby helping one lead a life free of debt.
The problem, however, is that while being debt free at some point in life is a pipe dream of a majority of people, very few are actually seen doing anything in this regard. Worse, they still keep looking for cheap and easy debt for further indulgence, notwithstanding its after-effects on their lives.
Actually, getting into debt is always not bad. Sometimes, particularly in times of crisis and emergency, you just can’t avoid it. But if managed well, this can even have a positive affect on your finances in both short as well as long run. However, the problem starts when people start taking debt for self-indulgence as well as keeping their friends and neighbours jealous.
In a sure sign of debt getting out of control, people start using their plastic money even for recurring expenses like getting the gas filled in the car, buying groceries and clothes, among others. Young men and women, pressed between small salaries and spiralling financial responsibilities, find it very easy to get tempted to go towards credit cards to help them get through the month. One never knows when one really gets caught in the debt trap, until one has to start borrowing to make pressing interest payments and outstanding loans. This eventually leads to spiral from which it becomes difficult to get out of.
Debt management, therefore, should be one of the integral parts of your personal finance. Managing your debt means reshuffling and seeing what you should do to pay back the debts. This also means choosing the best loan option whenever one needs to borrow.
Here’s what you should take not of:
1) Avoid Getting Into New Debt:
As a first step towards debt management, you should avoid getting into new debt till the time the old dues are cleared in full. You’ll also need to be disciplined about paying down the debt.
2) Prioritise Your Dues:
You need to prioritise your dues and begin clearing them. You should know the costliest loan you have taken and this is the one you should clear first. For instance, clearing your relatively cheap housing loan won’t pay much if you are having huge credit card dues or other costly loans.
3) Refinance:
Refinancing your debts to a cheaper deal is one of the most effective ways of freeing money up and making loans more palatable. But as a precautionary step, you should avoid extending the tenure of the loan as in that case you may end up paying more in interest.
4) Debt Consolidation:
You can also resort to debt consolidation. It basically means replacement of multiple loans with a single loan, often with a lower monthly payment and a longer repayment period. Rather than paying off several separate bills each month, a consumer consolidates his/her debts with a financial institution that will arrange for one lower monthly payment extending over a period of time. But this method too is not without its fair share of problems.
5) Zero-Interest Balance Transfer:
These days credit card companies are giving the option of zero-interest balance transfer under which no interest is charged for the first three months if you transfer the out standings of your other cards to their card. Only if you are unable to pay off the debt entirely during this period, you will be charged interest, that too at a bit lower rate. However, this scheme is also not without problems, but if used smartly, you can slash the cost of your debt.
6) Loan On Phone:
You can also convert some of your credit card purchases into relatively low-interest EMIs if you inform the card issuer within the specified period of making the purchase. This way you can save some money on interest.
7) Speeding Up Payments:
This is the most effective way of clearing your debt early as well as putting more money in your pocket over a lifetime. According to a rough estimate, for instance, if your are having Rs 1 lakh as credit card dues on which you are paying, say, 40% interest, then it will take close to 15 years to clear your dues if you continue paying 5% of the outstanding amount each month. The total payout and interest in this case would be Rs 265,950 and Rs 165,950, respectively. However, if you decide to pay 10% instead, you won’t only be able to clear the dues in just 7 years-and-a-half, but the total payout would be Rs 142,780, with only Rs 42,780 being the interest component. The Rs 123,170 saved in interest can be further invested. The gain, however, would be bigger as, for the sake of simplicity, we have not included other charges like service tax and annual fees, among others, which will make the repayment period even longer, and the payout bigger.
Thus, if you’re in the habit of making relatively small payments, stretching beyond your comfort zone could pay off big in the long run. And applying the same trick with your housing and other loan repayment can give you far better results.
It is clear, thus, that you should always avoid accumulating more debt as that is easy to slip into and very hard to get out of. However, if that is difficult to resist, then exercising some precautions will help. Ensure you take loans for building assets like home and not for instant gratification. Also, ensure that the loans you have taken are based on your current earnings and not future estimations. Restrict the loan tenure, amount and EMI which suit your lifestyle. And invest in better-return giving assets which can then be used to pay off the loans.
8) Last word:
The less debt you have, the happier and wealthier you’ll be!
9) PITFALLS
Getting into debt is always not bad If managed well, this can even have a positive affect on your finances in both short as well as long run. The problem starts when people start taking debt for self-indulgence or start indiscriminate use of plastic money for recurring expenses. Debt management should be an integral part of personal finance. Managing your debt means reshuffling and seeing what you should do to pay back the debts
Debt management, in fact, assumes more importance in the light of the fact that today debt has become a way of our lives, with consumer finance schemes and credit cards becoming big drivers of this devil. Rising disposable incomes, soaring aspirations and convenience in availing credit have increased the amount of debt that an average individual is carrying. In the US, for instance, the household debt-to-income ratio is said to have reached an all-time high, topping 19%, with Americans collectively spending more than what they have earned for the past two years in a row. Likewise, the latest Grant Thornton research shows that personal debt in the UK has forged ahead of its GDP for the second year running. And, in all probability, India is also heading for a similar mess — sooner or later.
In such a scenario where delinquency rates are also increasing due to high interest rates, debt management becomes imperative. Also, because every year lakhs of people spend thousands of rupees only as interest on various loans taken by them. Therefore, following a prudent approach in managing one’s debt can go a long way in saving this money and thereby helping one lead a life free of debt.
The problem, however, is that while being debt free at some point in life is a pipe dream of a majority of people, very few are actually seen doing anything in this regard. Worse, they still keep looking for cheap and easy debt for further indulgence, notwithstanding its after-effects on their lives.
Actually, getting into debt is always not bad. Sometimes, particularly in times of crisis and emergency, you just can’t avoid it. But if managed well, this can even have a positive affect on your finances in both short as well as long run. However, the problem starts when people start taking debt for self-indulgence as well as keeping their friends and neighbours jealous.
In a sure sign of debt getting out of control, people start using their plastic money even for recurring expenses like getting the gas filled in the car, buying groceries and clothes, among others. Young men and women, pressed between small salaries and spiralling financial responsibilities, find it very easy to get tempted to go towards credit cards to help them get through the month. One never knows when one really gets caught in the debt trap, until one has to start borrowing to make pressing interest payments and outstanding loans. This eventually leads to spiral from which it becomes difficult to get out of.
Debt management, therefore, should be one of the integral parts of your personal finance. Managing your debt means reshuffling and seeing what you should do to pay back the debts. This also means choosing the best loan option whenever one needs to borrow.
Here’s what you should take not of:
1) Avoid Getting Into New Debt:
As a first step towards debt management, you should avoid getting into new debt till the time the old dues are cleared in full. You’ll also need to be disciplined about paying down the debt.
2) Prioritise Your Dues:
You need to prioritise your dues and begin clearing them. You should know the costliest loan you have taken and this is the one you should clear first. For instance, clearing your relatively cheap housing loan won’t pay much if you are having huge credit card dues or other costly loans.
3) Refinance:
Refinancing your debts to a cheaper deal is one of the most effective ways of freeing money up and making loans more palatable. But as a precautionary step, you should avoid extending the tenure of the loan as in that case you may end up paying more in interest.
4) Debt Consolidation:
You can also resort to debt consolidation. It basically means replacement of multiple loans with a single loan, often with a lower monthly payment and a longer repayment period. Rather than paying off several separate bills each month, a consumer consolidates his/her debts with a financial institution that will arrange for one lower monthly payment extending over a period of time. But this method too is not without its fair share of problems.
5) Zero-Interest Balance Transfer:
These days credit card companies are giving the option of zero-interest balance transfer under which no interest is charged for the first three months if you transfer the out standings of your other cards to their card. Only if you are unable to pay off the debt entirely during this period, you will be charged interest, that too at a bit lower rate. However, this scheme is also not without problems, but if used smartly, you can slash the cost of your debt.
6) Loan On Phone:
You can also convert some of your credit card purchases into relatively low-interest EMIs if you inform the card issuer within the specified period of making the purchase. This way you can save some money on interest.
7) Speeding Up Payments:
This is the most effective way of clearing your debt early as well as putting more money in your pocket over a lifetime. According to a rough estimate, for instance, if your are having Rs 1 lakh as credit card dues on which you are paying, say, 40% interest, then it will take close to 15 years to clear your dues if you continue paying 5% of the outstanding amount each month. The total payout and interest in this case would be Rs 265,950 and Rs 165,950, respectively. However, if you decide to pay 10% instead, you won’t only be able to clear the dues in just 7 years-and-a-half, but the total payout would be Rs 142,780, with only Rs 42,780 being the interest component. The Rs 123,170 saved in interest can be further invested. The gain, however, would be bigger as, for the sake of simplicity, we have not included other charges like service tax and annual fees, among others, which will make the repayment period even longer, and the payout bigger.
Thus, if you’re in the habit of making relatively small payments, stretching beyond your comfort zone could pay off big in the long run. And applying the same trick with your housing and other loan repayment can give you far better results.
It is clear, thus, that you should always avoid accumulating more debt as that is easy to slip into and very hard to get out of. However, if that is difficult to resist, then exercising some precautions will help. Ensure you take loans for building assets like home and not for instant gratification. Also, ensure that the loans you have taken are based on your current earnings and not future estimations. Restrict the loan tenure, amount and EMI which suit your lifestyle. And invest in better-return giving assets which can then be used to pay off the loans.
8) Last word:
The less debt you have, the happier and wealthier you’ll be!
9) PITFALLS
Getting into debt is always not bad If managed well, this can even have a positive affect on your finances in both short as well as long run. The problem starts when people start taking debt for self-indulgence or start indiscriminate use of plastic money for recurring expenses. Debt management should be an integral part of personal finance. Managing your debt means reshuffling and seeing what you should do to pay back the debts
