Debt is one among the biggest personal finance problems that many people face. From business losses to erratic spending habits, debt can be a vicious cycle that continues to wreck your finances if you don’t take control of it. It can also cause mental stress and exhaust all our existing assets. In most cases, debt is a reflection of the financial habits of the individual. Making poor and misguided money choices to satisfy one’s long-held desires is the reason behind why many fall into debt traps. Simply stated, debt hampers your ability to build wealth. Getting out of debt requires a mix of strategies.
Below are a few strategies that can supercharge your debt payoff:
1. Cut the urge to spend: A rupee saved is a rupee earned – this old saying is relevant even today in our fast-paced world. Avoid instant gratification. Think before you splurge on those extra pair of shoes. Start by compiling a list of your needs and wants. Prioritize and allocate your resources on only the most important needs. Knowing your priorities can help you in controlling spending so that your wants don’t overshadow needs.
2. Avoid all fresh liabilities: Avoid all expenses/activities that can add to your debt problem. Non essential home renovations, buying a new car or spending on luxurious vacations can add debt back to the pile. All of this can wait until you are in a better financial place.
3. Accord priority to debt repayment: Credit car payments, car loans, student loan, home loans, you may have more than one debt. It’s important to be aware about the type of debt that you want to clear on priority. Those with high interest rates should be your priority. Credit card interest rates charges are something not easily understood, for e.g. typical interest charges are 3-4% per month and not per annum. Therefore, it works out at 36-48%interest rate per annum. Further to simplify, a Rs100,000 card outstanding will attract Rs 3000-4000 monthly as interest alone.
4. Consolidate and restructure debt: When debt becomes too burdensome, borrowers look for ways to reduce or resettle their debts. Debt consolidation and debt restructuring are two debt management tools for those who have more debt than they can repay. Renegotiating debt and liabilities from many places to one facility with conducive repayment schedule and interest rates, alternatively refinancing at lower rates will accelerate your chances of debt unwinding.
5. Invest to pay off early: Understanding the impact of returns on investing, specifically compounding returns on investing over time, can help you manage your debt efficiently. When you set aside money and invest it over time, your money will grow significantly bigger than your investment, thereby helping you to cut your debt and have a surplus.
For example, 10% interest rate for Rs 10 lakh for 20-year period will work out this way:
(By Santosh Joseph, Founder and Managing Partner, Germinate Wealth Solutions LLP)