Want to save more money for a secure future? Clear your debt first; Here’s why

January 4, 2020 10:31 AM

Savings, a crucial component in the realm of personal finance, often take a backseat when you have debts. Hence, basic money management calls for clearing them before you start saving.

saving, investing, how to save money, debt, how to get out of debt, systematic investment plan, SIP, mutual fundsBeing debt-laden can not only hamper your long-term goals but, also be a cause of major stress.

When Ramesh zeroed in on the car he wanted to buy and decided to save for it, he received an email from his bank about the deduction of EMIs on two home appliances he had purchased on a loan. The EMIs were to continue for 6 more months, which was 10% of his salary. Ramesh immediately knew that he was not in a position to save for his dream vehicle at least for the next six months.

Savings, a crucial component in the realm of personal finance, often take a backseat when you have debts. Hence, basic money management calls for clearing them before you start saving.

The need to be debt-free

Debt in any form means tailor-made expenses before income. Be it loans or credit card dues or even borrowing from friends and family, it results in paying EMIs (for loans) and minimum balance (for credit cards).

In case you fail to do so, the same can have an adverse effect on your credit score. On the other hand, failing or delaying paying back to friends and family members can sour relationships. Along with these, carrying debt is a big roadblock in achieving financial freedom and saving for crucial life goals, both short-term and long-term.

However, when you are debt-free, you are in a better position to focus on your life goals and most importantly save up for them. Taking the example of Ramesh, if he didn’t require to pay EMIs on the home appliances, he could have channelised that money towards saving for his car.

Are debts avoidable?

In the course of your financial journey, certain debts can’t be avoided, such as availing a loan for buying a house or funding your child’s higher education. However, note that these debts help you create an asset and provide the necessary skills to your child towards building a constructive future.

On the contrary, lifestyle-related debt such as borrowing for undertaking a vacation or buying a new gadget can impair your savings potential and dent long-term wealth creation in the process. These debts, which are generally unsecured, carry a high rate of interest, resulting in a significant financial outgo.

Also, opting for them too often can result in falling into a vicious debt trap that can put your financial security at risk. Hence, it’s in your best interest to avoid life-style related debts and keep them at bay. At the same time, it’s prudent to direct windfalls received in the form of bonuses and otherwise towards paying off liabilities first.

At the same time, it’s vital to not fall for marketing gimmicks and offers such as No Cost EMIs as there’s no free lunch that exists in the financial world.

To sum up

Being debt-laden can not only hamper your long-term goals but, also be a cause of major stress. If you find it difficult to save, an ideal way is to automate it. For instance, a systematic investment plan (SIP) in mutual funds not only aids in disciplined and systematic savings but also building a corpus for essential life goals. At the same time, it helps you to stay invested through thick and thin and make the most from the opportunities presented by the markets.

To make sure you stay clear off unnecessary debts, review your financial standing and have a holistic view of your long-term goals. Prioritise them, save and invest in the right avenues to be on the road to financial freedom.

(By Rahul Jain, Head-Personal Wealth Advisory, Edelweiss)

Get live Stock Prices from BSE, NSE, US Market and latest NAV, portfolio of Mutual Funds, calculate your tax by Income Tax Calculator, know market’s Top Gainers, Top Losers & Best Equity Funds. Like us on Facebook and follow us on Twitter.

Financial Express is now on Telegram. Click here to join our channel and stay updated with the latest Biz news and updates.

Next Stories
1Hike in contactless transaction limit to further digital drive: Industry
2Deposit, loan interest rates to largely remain flat as RBI keeps policy rates unchanged
3The importance of life insurance in your life