Off late we have received multiple queries from our readers with respect to the debt trap.
Banking products such as low-cost EMI, interest-free EMI, credit card and the likes have undoubtedly made life easy for individuals but at the same time, it has resulted in people pending more than their purchasing power.
This has gradually resulted in individuals entering the horrendous trap of debt!
In this blog, we seek to uncover how you can break free from the maze of debt and achieve financial freedom.
The first step to eliminate debt is to understand what led to it in the first place.
Let’s have a better look.
In this article
- What leads to debt?
What leads to debt?
Following are the steps that shall help you achieve financial freedom and get rid of debt
1. It is okay to make a sacrifice
Achieving financial freedom may not be easy but it is surely not very hard. To put things simply, you need you to reduce your expenses and increase your income.
This shall help in two ways:
- You can begin prepayment using the extra income.
- You can reduce your debt level with no new debt addition.
To reduce expenses, you must start tracking them! You can then filter out discretionary spendings such as expenses on cigarettes, alcohol and things that you can live without (Yes, you can).
2. Pay the lowest balance first
Paying off a loan gives you a good feeling.
Start from the lowest!
Start with one or two smaller loans and try to pay those first with your surplus money (if you have)..
You will soon realize that living with less debt is extremely satisfying and you would want to pay off the others as quickly as you can.
3. Pay the highest cost debt first
This is a wise financial decision.
If you start paying off your debt that costs you around 14% interest per annum then the one that charges
8% interest, you will start saving 6% extra interest from the costlier borrowing.
4. Budgeting helps
This is the time you separate your wants from your needs.
Your goal should be focused on your basic requirement and not your interest. Always keep in mind that the faster you pay off your loans, the quicker you will be able to rebound.
Always plan your expenses intricately.
Even a little extra spending can impact your repayment capability, so plan your finances!
5. Bankruptcy should be your last resort
Typically, in the western world, it is seen that under financially painful situations, individuals file for bankruptcy.
While this is an option in India too, we believe you should consider bankruptcy only as a last resort.
Because it may adversely impact your future.
Your credit worthiness (when pulled from CIBIL) will show you as an individual who has filed for bankruptcy. Thus, it will make you ineligible for future borrowing, irrespective of how legitimate the reason might be.
6. Know your alternatives
It’s okay if plan ‘A’ and plan ‘B’ don’t work out, plan ‘C’ might!
Always have a strategy in place while repayment is being done. You must always have a backup plan for any unforeseen situation.
The plan should take into consideration, the level of debt, balance pending, interest rate, immediate future expenses, sources of income and emergency saving.
You should also decide which combination of repayment strategy will work best for you.
7. Loop in creditors
This may sound unrealistic but if you approach creditors, including credit card companies, auto lenders, banks etc. you can always get some help with respect to the repayment plan.
These people devise a strategy that will suit well for both parties and they may sometimes restructure borrowing to suit your pocket size.
8. Be resilient
Good things take time to happen. Similarly, financially resilient people bounce back from difficult times!
Setting goals, making a concerted effort to achieve them and maintaining a disciplined approach will always help you move
You can approach your lenders and get your debt consolidated into one repayment module, with a lower interest rate or higher repayment tenure.
This can be a good approach, but be sure that you stick to the repayment plan restructured for you.
10. Invest a small amount in high returns instrument
Consider investing in mutual funds for a long-term period so that even a small amount every month helps
you accumulate a sizeable wealth over time.
While you may have used all your income every month to repay loans, try saving as low as Rs 1000 per month for
investing in mutual funds.
This will ensure your interest cost is recovered well over time.
With a 6-9 years horizon, you can always look to invest in small-cap equity funds, that have the capability of generating healthy returns over the above time duration
Remember, it doesn’t really matter how you get rid of your debt.
What is more important is to develop a financial discipline towards debt. It is not bad to avail debt but tracking
the flow of your money always helps you remain safe.
Do you think these 10 ways can help you break free from the maze of debt? Let us know!
Should you need any assistance with respect to debt planning or towards mutual fund investment, feel free to drop in a line and we shall be glad to assist.
Disclaimer: The views expressed in this post are that of the author and not those of Groww