Tuesday, August 23, 2011

From Debt To Life

In the past 5-10 years, debt has become very easy to acquire and people are tempted by large number of banks would extend good offers to the borrowers. Combine this with rising incomes and aspirations and we have a huge population of young generation that would have at least 2 loans – home and car on their balance sheet. Further, with the explosion of credit cards and change in life style, especially dining, shopping, movies, travel, etc., we are today taking much more debt than we ever did in past. And the only ones who is laughing are the lenders of these credit to you...
With rising interest rates, people who have bought loans few years back now find that the loan EMIs are now a bigger burden, especially with the inflation also running high in recent past. A average household's budget is severely impact and there would be a large population which would be suffering under the burden of loans today. People are now realizing the importance of moving to a debt free life. However, one needs to understand why it is a better idea to get rid of the debt sooner than later and ways to do so. Excessive debt can lead to many problems, such as:
  • Falling short of spending power
  • Not being able to deal with unexpected costs
  • Restricting your ability to take part in social activities
  • Causing stress and depression
  • And many more...
Reducing Expenses:
Reducing expenditure in today scenario is perhaps not an idea but something that all of us are practicing today. While most of would be wise to know how costs can be controlled, there are a few pointer which one may would be better-off considering.
  • Prepare a budget/plan and stick to it: This is the best way to keep expenses in check, be it business or monthly household expenditure. If at the initial stage you plan a budget for yourself, you will not go ;overboard and hence avoid any new loans.
  • Get frugal If you can cut down on unnecessary expenses, you will save more and be self sufficient to meet your expenses. Also, think twice before buying whether you really need the product or is it an impulsive buying. For commuting to office & back, you can pool office collegues to travel together.
  • Spend wisely: There are many ways to spend wisely. Fix / plan maximum number of outings for movies / dinners / small trips / vacations, etc. for month. Use public transportation or pool with colleagues on way to work. Stock more of things you need when you get very attractive discounts. Plan buying in advance for heavy sale discounts seasons. Use public transport for long distance travels.
  • Save and Invest - Save for the rainy day and invest whatever amount you can. It can be extremely useful at any point in future. Even small amounts are
  • Pay all your bills on time – It is an important practice to pay off the bills on time. Delaying the process would add on the amount to be repaid later and also, the penalty and interest costs get added on.
Ways to reduce your debt:
  • Behavioural change: Understanding that you have a debt issue and changing your behaviour and life style accordingly is the first step to reducing your debt.
  • Stop Adding to Debt:: Not taking additional burden of loan is a very basic idea. One may just begin by limiting use Credit cards and instead use Debit cards.
  • Consolidation of Debt: Consolidating debt is another idea which may not reduce debt but would make in easier to manage same. It can help consolidating payment period, EMI and also interest rate for all the different debt that you have. You may negotiate for better deal with your bank manager and rework the repayment schedule for such consolidated loan.
  • Repayment of Debt: Repayment of loans is the obvious way to reduce debt. Often, there are limitations of repayment in terms of the extent of repayment and period after which is repayment is done. Repayment of debt can begin by prioritising the loans on basis of the most expensive loans and/or loans with higher duration which can be paid of first. Addtional payments can be made as and when you get some additional funds or by accumulating small sums of money for few months and then making the repayments. Credit card loans, if any, are generally the most expensive loans, followed by personal and car loans. Home are probably the least expensive of the loans and also offer tax advantages and hence can be paid at least prority.
  • Restructuring of Debt: Another idea is reworking out the loan, in terms of interest rates & repayment period. There is no absolutely no harm negotiating with your creditors or bankers for a better rate or deal. If you make a persistent effort and have good terms with them, a small change will also make a big difference overall.
  • Last Resorts: As last resort to reducing the burden of team, you may take personal loans from amongst your family & friends and repay the expensive loans. Another alternative is the liquidate your existing investments and repay the loans. Typically we can begin with the investments that have the lowest rates of returns, like debt which would probably have lower interest accruals that the interest rates payments on loan. One should however avoid diluting long term savings that may yield good returns, especially equities. Remember that this option is less than ideal because you are essentially stealing from your future.
Understanding the importance is the first step, acting upon it the foundation and following it diligently, a habit. It needs lot of discipline and hard work but one who can practice this will not only have a debt free life, but a care free life.

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