Abraham Maslow's Hierarchy of Needs suggests that a human's fundamental needs begin with basic necessities such as food, clothing, shelter and water and then progress towards safety and security, love and belonging, self-esteem and self-actualization. However, in today's society, many people are drawn towards the allure of a luxurious lifestyle, such as owning big cars and large homes. People are often so enticed by these things that they are willing to take out large loans from banks, even if the interest rates are high. Further, the growth and popularity of digitization has enabled people to conveniently pay bills, shop, order food, book tickets and perform many other tasks from their mobile devices. However, this convenience has also led to an increase in spending, which has resulted in financial debts for individuals, regardless of their monthly earnings. It is necessary to realize that debts can drain your finances, leaving you with bills that loom over you and thus hinder your financial progress. Therefore, it is important to eliminate debt for a hassle-free life. This article discusses ten tried and tested strategies that can help you get out of debt and achieve financial freedom. Read on!
Causes of being in debt distress?
In today's world, credit and debit cards have become the norm for making payments, and people prefer not to carry cash. This has made shopping more convenient as people can make purchases by simply swiping their cards. Using credit cards as a means of fulfilling material desires is misguiding. This is because credit card purchases are essentially delayed payments that accumulate over time, resulting in future financial obligations i.e. debts which you will have to eventually pay off.
Similarly, it is common to receive calls from banks and third parties offering pre-approved personal, home, or car loans. Personal loans, credit cards, car loans and home loans are all forms of debt. These types of loans are usually given to people with a good track record of loan repayment. There are two types of pre-approved loans: unsecured and secured. Unsecured pre-approved loans usually consist of personal loans and credit cards, while secured loans include car loans and home loans. Sometimes people take out loans simply because they were offered one, even if they don't have a pressing need for it. It's important to remember that every loan, pre-approved or not, comes with a cost that you will ultimately have to bear. Debt from unsecured loans such as credit card and personal loans can be financially damaging due to their high interest rates. Personal loan interest rates range from 13-18 percent or even higher, while credit card interest rates can be as high as 36-48 percent per annum after rolling over outstanding balances. Despite this, many people continue to rely on credit cards and other debt options for easy money and overspend on impulse purchases, ignoring their monthly budget. Unfortunately, the average Indian is not immune to these trends and the number of people weighing under the debt burden is rising rapidly. If you are able to generate a return of 12% p.a. on your investment portfolio but you also pay the same or higher percentage as interest on your loans, you do not create any wealth. Thus, you need to eliminate any debt you have as it can significantly impact your returns.
Strategies to get out of debt:
#1. Make a budget:
Prior to embarking on a journey towards becoming debt-free, it is imperative to create a comprehensive list of both your income and expenses, which is commonly referred to as a monthly budget. Creating and adhering to a budget can thus be a straightforward process that provides a comprehensive overview of your income and expenditures. By constructing a budget and identifying all your recurring expenses, such as rent, school fees for your children as well as utility and phone bills, you can determine how much disposable income remains after covering your bills. The amount that remains can then be allocated to paying off any debts you may have.
#2. Cut back on impulsive purchases and unnecessary expenses:
In today's consumer culture, it's easy to give in to temptation and make purchases without considering the consequences. However, this behavior can lead to anxiety and unhappiness, which can have negative effects on your psychological well-being. To understand and control impulsive buying, it's important to ask why we are motivated to do so. There are several reasons for impulsive buying, and being aware of them can help you make smarter, more rational decisions when shopping. For example, limit your purchases by implementing a waiting period of 10 days before buying something you want. This way, you can avoid impulsive buying and make sure that you really need and want the item.
Reducing your expenses is a crucial step towards paying off your debts. Take a close look at your expenses and see where you can make adjustments. So avoid impulse purchases and luxury items until you have become debt-free or have significantly reduced your Equated Monthly Instalments (EMIs) and loans. You can decrease your expenses by eliminating anything unnecessary, such as limiting the number of outings or eating out less frequently and making some small adjustments to your lifestyle.
#3. Stop treating your payment as an option:
It's important to treat debt repayment as a non-negotiable priority, just like any other essential bill payment. Don't consider it as an option that can be delayed or skipped. Make it a habit to pay off your debts as soon as possible and avoid putting it off until the last minute. Ensure that you allocate a portion of your income towards paying off your debts before spending on other expenses.
In case of housing loans, there are various online EMI calculator tools that offer detailed information on the interest and principle paid and outstanding on a monthly or yearly basis. Additionally, you can request a Financial Year statement from your bank. It is important to carefully calculate the amount you want to raise or repay to reduce the loan tenure or EMI amount. This way, you can save accordingly and have a clear understanding of your future financial arrangements.
#4. Automate debt repayments:
To make things easier and more organized, consider automating your debt payments. Set up automatic payments for at least the minimum amount due for each debt, so you won't have to worry about forgetting to make a payment. You can either authorize the companies to deduct the amount from your account or use your bank's online bill pay service to schedule recurring payments. This way, you can focus on managing your other expenses without the risk of missing a payment.
#5. Get rid of credit cards:
It's wise to eliminate reliance on credit cards as they can be a dangerous crutch. While mutual fund investments can generate a healthy return of 12-15% per annum, paying double that amount towards credit card interest component can severely limit the growth of your investments and hinder progress towards your financial goals. Therefore, it's essential to avoid overspending and rely on credit only when necessary, to make sure your investments are working for you, not against you. To avoid falling into a debt trap, it is important to not roll over credit card dues, limit credit card usage to 50 percent of the total limit, avoid cash withdrawals and keep an eye on credit card statements for technical errors.
#6. Pay your credit card bills on time:
It is important to track your credit card spending to ensure that you do not exceed your limit. Always pay credit card bills on time to avoid incurring extra interest or late payment fees. Failure to make payments results in late fees and penalties and also means that you are carrying a balance on your card. Interest is charged on the outstanding balance, which compounds every month. It is best to avoid taking cash advances as they generally attract higher interest rates.
#7. Use cash:
Using physical cash is the simplest solution to avoid accumulating more debt. Withdrawing cash and using it to make purchases or pay off existing debt within the budgeted amount can prevent you from overspending and relying on additional credit. This approach allows you to exercise greater control over your finances while also avoiding the accumulation of further debt.
#8. Stop adding more debt:
The initial step to becoming debt-free is to avoid accumulating any more debt on top of what you already owe. Consider the consequences of adding more debt to your current balance. For instance, say if you're only able to pay off 10% of your debt and then add another 12% to the existing debt, it will take much longer to repay everything. Adding to your existing debt will only make it harder to get out of it. Therefore, focus on paying off your current debts first before considering taking on any new ones.
#9. Find ways to boost your current income:
When paying off your debts is challenging, try to explore ways to increase your current income.
Some ways could be:
Consider opportunities that offer higher commissions, overtime pay, or bonuses. The more money you earn, the more you'll have available to put towards repayment of your debt.
Tapping into your hidden talents is another way to achieve a debt-free life. Each person possesses some unique skills or abilities that can be utilized to earn some extra income during difficult times. For instance, you can consider offering academic, dance, or yoga classes, or taking up freelance work to increase your monthly cash inflow. This collective amount can then be invested in mutual funds, corporate bonds, recurring deposits, fixed deposits, etc. in consultation with a financial planner for more information on how to save wisely.
Consider selling unwanted or old furniture that is stored in your storeroom, either online or offline to generate extra cash.
Carpooling with friends or colleagues, or using public transportation instead of driving your own vehicle, can help you reduce fuel and parking costs during financially challenging times.
Bringing home-cooked meals to work instead of buying lunch can also help you save money and stay healthy.
#10. Keep patience:
Eliminating debt requires perseverance, patience, and motivation. Although the desire to eliminate debt may be strong and immediate, it's important to understand that it's a long-term commitment and you may need to adjust to a new lifestyle and remain patient to reap the benefits of becoming debt-free. It's like going on a financial diet, which can be challenging but necessary for a stress-free life. Sacrifices will likely be necessary to become debt-free and it may also be necessary to include your family in this process. Therefore, it's important to discuss your financial concerns with your family and brainstorm new ideas to increase your income. Reducing debt takes discipline and is a long journey, so it's helpful to set reminders on your calendar or alarms on your phone to remind you to pay bills. Any action that can help you keep your focus on your path to financial freedom is encouraged and often necessary.
Should you never take on a debt?
Debt may not always be negative as it can be constructive or non-constructive. Non-constructive debt refers to the debt that is acquired to buy consumer goods or meet lifestyle expenses which however do not increase in value over time. Interest paid on such debt is a cash outflow with no enhancement in the value of the asset or service purchased. In contrast, housing loans are considered as constructive debt since the value of the property is expected to appreciate over time. Financing a home through a housing loan is an acceptable practice.
Proper management and control are necessary when you take on a housing loan. A good rule of thumb is to ensure that the total amount of EMIs does not exceed 50 percent of your monthly take-home pay. Lenders who provide home loans take this into account when determining the amount of loan that can be sanctioned and usually the loan amount is such that the EMI remains around 45 percent of the monthly income.
Conclusion
Wealth creation involves not only saving money, but also saving every penny possible and investing it wisely with specific goals in mind. While individual goals may differ, the rules for saving and investing are largely the same for everyone. By harnessing the power of compounding, anyone can benefit from it and work towards becoming debt-free.
It is important to be smart about how you use debt as your usage of credit can have a significant impact on your credit history and future loan opportunities. At the same time, it is also important to avoid overspending and make timely payments in order to maintain a debt-free life. Becoming and being debt-free can contribute significantly to your goal of achieving financial freedom. By adopting the strategies listed in this article, you can manage your debt responsibly and eventually become debt-free!
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