Money tips: How to cut your expenses and reduce debts

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January 6, 2021 12:45 AM

Financially challenging times force us to cut corners. The idea is to save as much as you can so that your most important financial commitments such as rent, debt repayment, groceries, education expenses, etc., are consistently met despite cash-flow issues.

If you’re required to go on a strict financial diet, you can explore ways to save a big chunk out of your housing expenses.

Financially challenging times force us to cut corners. The idea is to save as much as you can so that your most important financial commitments such as rent, debt repayment, groceries, education expenses, etc., are consistently met despite cash-flow issues. However, cost-cutting strategies such as curtailing discretionary and lifestyle expenses, albeit crucial, may be insufficient to bring your finances back on track.

You may also need to explore ways to save money in big chunks to make an immediate and significant impact if your situation demands so. These steps might also help you avoid accumulation of additional debt or the liquidation of essential assets in order to stay afloat.

Change your rented house
Housing is one of the most important expenses for a majority of us. If you’re required to go on a strict financial diet, you can explore ways to save a big chunk out of your housing expenses. If you live in a big rented house in the middle of a city, you can consider moving to a smaller house in the same locality or a big house on the city outskirts to boost your savings. If doing so allows you to save, say, Rs 10,000 in a month, your total annual savings just from this exercise could be Rs 1.2 lakh. Also, if you’re a young individual currently working from your rented home, you can explore the option of moving in with your parents until your finances stabilise.

Move to a low-interest loan
If you’re struggling with a high-interest loan such as personal loan or credit card debt, you can consider moving to a low-interest loan, like a securitised loan, to not just make your monthly repayments more affordable but also reduce your overall interest burden and help you become debt-free faster. Let’s assume your credit card dues have snowballed to Rs 1 lakh at 36% p.a. giving you sleepless nights. Now, paying only the minimum amount due, which will be a fraction of the total outstanding, could keep your card account active. But the total dues might fill up your credit limit to a large extent, leaving the card almost unusable for your day-to-day expenses.

In such a scenario, taking a secured loan such as a gold loan or a loan against your FD, vehicle or endowment plan might help you clear the dues in one shot while considerably cutting your interest burden. For example, a gold loan of Rs 1 lakh at 8% p.a. for five years would come with an EMI of just Rs 2,027 with a one-time processing fee of Rs 5000. Later, when your finances stabilise, you can consider pre-closing your gold loan after paying the pre-closing charges. With this, you can clear your credit card dues in one shot and get to use your card for essential and emergency expenses while avoiding an adverse impact on your credit score.

Similarly, if you’re struggling to repay your MCLR-linked home loan EMIs, you can consider moving to a repo-linked loan offered either by your bank or a new bank, especially if the difference in rates is considerable and you’re towards the beginning of your loan. For example, a reduction in 100 basis points could not just bring down your EMIs but also drastically reduce your overall interest burden by lakhs in the long-term. Do note, you need to have a credit score over 750-800 to bag the best rates, loan refinancing would involve paperwork and processing charges, and the rates of a repo-linked loan would increase whenever RBI hikes the key policy rate in the future.

(The writer is CEO, BankBazaar.com)

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