In 2020 resolve not to let debt take over your life. It doesn’t matter whether you have just one or five loan repayments, what matters is the proportion of your monthly income that goes towards these payments.
If loans keep piling on, you will find one day that you are unable to repay with your regular income stream. Getting stuck even with one large sized housing loan can be a bother, if say your job is not secure or you want to change your profession. Unfortunately, loans tie you down and you will realise that only when it is already too late.
However, there are ways to renew your finances by reducing debt. Here are some suggestions.
1. Save more, stop impulse buying
Building the habit of saving will automatically bring down some of the last mile debt, credit card overdrafts and instalments on new gadgets. While many of these instalments are interest free, if you pile on too many such monthly repayments, at one point your salary will not be enough to pay them all. Then you may take on another personal loan to help you pay back all the small ones you have.
A better option, instead of funding your purchases, vacations and electronics on loan is to first save. Put aside 20%-25% of your salary every month as savings. Plan your spends in advance so that you can invest regularly to build a corpus that enables you to afford spending. Systematic investment plans in mutual funds can help you do just that.
2. Stop adding new loans
A delay in your credit card payment too, technically is a loan. You will end up paying exorbitant interest at a monthly rate of 3%-3.5% if you delay payments on your card. You may then decide to make your credit card repayment in monthly instalments too, how many monthly loan repayments can you really afford?
Are you already living in a house that you bought on a loan? Then think twice before ‘investing’ in another property by taking a loan. Right now, the EMI might seem affordable, but if real estate prices don’t move up or if you don’t get rental income, it becomes a burden to keep paying an EMI. If you keep adding loans, it gives a false sense of security, which can crash if your monthly earnings don’t improve or if your spending habits expand at a faster rate.
If you are feeling the burden of your loans already, then along with building your savings and slowing down on incremental loans, you need to use surpluses created from your investments to make advance repayment on your large outstanding loans.
3. Prepay with the help of investments
If you are feeling the burden of your loans already, then along with building your savings and slowing down on incremental loans, you need to use surpluses created from your investments to make advance repayment on your large outstanding loans. While doing this negotiate the monthly repayment lower rather than settling for a shorter loan tenure. Prepayments can free up more monthly cash flow, which in turn can be better utilised to build a monthly investment chain.
These are not extraordinary steps to take, rather they are crucial if you are struggling with debt. Having too much debt holds us back in every way possible – monetarily, emotionally, and professionally. Think twice before adding another Rs 500 or Rs 1000 payment towards an interest payment, convert it into a regular monthly investment (SIP) instead.