A prudent saving and investing strategy is essential for securing your financial future.
A prudent saving and investing strategy is essential for securing your financial future. However, assuming that to be the only way to accumulate wealth and build an adequate nest egg is akin to financial hara-kiri. The fact is, in the absence of a good debt strategy, securing your financial future is not only difficult, but impossible as well. Just remember that the less debt you have, the happier and wealthier you are likely to be.
On this Independence Day, we are taking a look at 10 smart ways to get freedom from debt:
1. Know what you owe: The first step would be to obtain a credit report which consists of all your credit information including total outstanding debts, disputed accounts and payment history which would give you a good understanding on what steps to take next.
2. Resolve negative issues: Your credit report could have instances of incorrect information or even incorrect accounts mapped to your credit profile. “These need to be resolved with the respective lender to prevent further damage to your credit history. Written-off and settled loan accounts too reflect badly on your credit profile and you need to act on them. Once the negative issues are resolved, do ensure the changes are reflected in your credit report,” says Ranjit Punja, CEO & Co-Founder, Creditmantri.com.
3. Be careful with your credit card debt: If you own a credit card, pay attention to its terms and conditions. Always repay its balance in full at the end of the monthly billing cycle. Do not settle for the minimum amount. “Credit card debt is very expensive, with annualized interest rates and penalties ranging from 20% to 40%. If you don’t want your hard-earned money being drained into paying credit card debt, you should exercise caution with its use, and always settle your card bills on time,” says Adhil Shetty, CEO, Bankbazaar.com.
4. Differentiate between good vs bad debt: Think of the idea of ‘good’ versus ‘bad’ debt. Some loans help you buy assets whose value appreciates over time. For example, an education loan helps you acquire a financially-rewarding career, or a home loan helps you get a piece of property whose value appreciates over the long term. The more ‘good’ loans you take and repay, the wealthier you’ll be in the future. Question your own desire to take loans to purchase items that start depreciating the moment you buy them.
5. Maintain low debt: People have been for years getting the advice for prioritizing their debts and paying off their loans with the highest interest rate first. However, how many of them have tried to put it into practice? This requires one to plan out one’s debts and then try to reduce it regularly and systematically. True, this can be a difficult task, however, it can also be quite rewarding in the long run.
6. Use bottoming out of interest rate to your advantage: Interest rates have been trending downwards for three years now, and it is possible they will start rising in the foreseeable future. “Use this bottoming out of the interest rate to your advantage. You can either transfer your home or car loan to a cheaper, MCLR-linked loan, or start making principal pre-payments to reduce your loan balance at lower interest costs. Doing so may save you several lakh rupees in the long term,” says Shetty.
7. Actively manage your debt: If you are repaying a loan, do try and find ways to actively manage your debt. Instead of passively watching your EMIs being deducted every month, periodically take stock of your loan balance and interest costs, and look at ways through which you can maximize tax deductions, lower long-term interest costs, and get out of debt as quickly as possible.
8. Make on-time EMI payments: Paying your EMIs on car loans, personal loans and home loans on time will enhance your credit health. “Defaulting on such payments will sabotage your credit score and leave a negative impression on your credit report. The consequences can leave you in financial trouble in the future. Banks evaluate your creditworthiness based on your credit score which reduces on inconsistent payment of EMIs,” says Punja.
9. Make a monthly budget: A monthly budget would prove beneficial to your finance management. At the end of the month, review your actuals with the plan. If there is deviation, adjust it accordingly. Review your results continuously on a weekly basis. This way you will know what you are earning, how much you are spending and if you are on track with your goal.
10. Cut down on unnecessary expenses: Compulsive spending without measure can ruin your finances. Therefore, limit your expenses and stick closely to your monthly spend plan.