Debt can become a significant burden, if not managed properly. It can lead to financial stress, hamper your savings and restrict your future financial goals. To maintain a healthy financial position and avoid falling into bad debts, here are some essential strategies to consider:
Prepare a budget
Create a realistic budget that outlines your income and expenses. Track your spending habits and categorise your expenses into needs and wants. Allocate funds for necessities such as housing, utilities, and groceries, and set aside a portion for savings. By sticking to your budget, you can avoid overspending on non-essential items.
Create emergency fund
Build an emergency fund to handle unexpected expenses. Having a safety net helps you cover unforeseen costs without relying on credit cards or loans. Aim to save at least three to six months worth of living expenses in your emergency fund. This provides a cushion during challenging times and prevents you from resorting to debt for emergencies.
Prioritise debt repayment
Make it a priority to pay off your debts. Start by organising your debts, listing them by interest rates and balances. Consider using the ‘debt snowball’ or ‘debt avalanche’ method to tackle your debts systematically. Allocate additional funds each month to pay off your debts, starting with the one with the highest interest rate or the smallest balance. With consistent payments, you can eliminate your debts over time.
Avoid spending beyond your means
Avoid the temptation to live beyond your financial capabilities. Resist the urge to buy unnecessary items or indulge in excessive luxury. Focus on purchasing what you can afford rather than relying on credit and loans to fulfil your desires. By living within your means, you can prevent accumulating debt.
Adhil Shetty, CEO, Bankbazaar, says, “Beware of the urge to live off borrowed money. Also, be cautious of your income, health and life risks. Lower them by provisioning for an emergency fund and buying health and life insurance. That way, you will not have to borrow your way out of an emergency.”
Impulse purchases can lead to unnecessary debt. Before making a purchase, take some time to evaluate if it aligns with your needs and financial goals. Implement a waiting period, such as 24 hours or a week, before making a non-essential purchase. This allows you to assess if the purchase is truly necessary or if it’s an impulsive decision that could lead to regret and debt.
Use credit cards wisely
Credit cards offer convenience, but they can also be a source of debt if not used responsibly. Pay your credit card balances in full each month to avoid interest charges. If you cannot pay the full balance, make sure to pay more than the minimum payment to reduce interest costs. Avoid maxing out your credit cards and keep your credit utilisation ratio low. Regularly review your credit card statements to identify any errors or fraudulent transactions promptly.
“It is easy to get a credit card or a personal loan these days. With easy money abound, it is also easy to fall into bad financial habits, such as not repaying your dues in a timely manner. The consequences of a debt spiral are profound. It can hurt you financially, strain your income and ruin your credit score. It may lead to social isolation due to your lack of creditworthiness. All this combined can hurt your mental health too,” explains Shetty.
Save for major purchases
Save money in advance. Whether it’s buying a car, furniture, or going on vacation, setting aside funds specifically for these expenses prevents you from taking on debt. Practise delayed gratification and save until you have enough to make the purchase without relying on credit.
Avoid unnecessary loans
These days you are likely to get many offers for various types of loans. You can take any amount to buy things which you may not need. You must be cautious while availing loan offers. Short-term loans may have exorbitant interest rates and fees, trapping borrowers in cycles of debt. Explore alternative options such as banks or other reputed financial institutions for loans, if necessary, to reduce the interest burden.
If you find yourself overwhelmed by debt or struggling to manage your finances, don’t hesitate to seek professional help. A credit counsellor or financial advisor can provide guidance on debt consolidation, budgeting and saving more for achieving your financial goals.
- Credit cards offer convenience, but can also be a source of debt if not used responsibly
- Short-term loans may have exorbitant interest rates and fees, trapping borrowers in cycles of debt
- Before making a purchase, evaluate if it aligns with your needs and financial goals