Debt can be a significant stressor and depreciate your quality of life. Unpaid debts also limit one’s financial goals. While one may be aware of the negative implications of racking up debts, in today’s consumerist society, it may be hard to avoid showing off. Unnecessary purchases are the biggest cause of debt. Read on to know more about why you should avoid debt and what are the best strategies to get your financial health in order. Whether you have missed quite a few monthly payments or are just looking to take measures, the following read will provide you with the tools and information to help you achieve your financial goals.
Why should you avoid debt?
Debt is not necessarily bad in itself, but if left unchecked, it will spiral uncontrollably and can become burdensome.
- Interest payments: Whether you take a loan from a bank, NBFC, or any financial institution, you have to pay interest. If you miss your monthly settlements, your interest will accumulate into an immense financial headache in the future.
- Low quality of living: If you have a large number of debts and your debt-to-income ratio is not favorable, you will have less money to spend on monthly expenses. It leads to a comparatively low quality of living, which may cause health concerns in the long run.
- Risk of loan default: If you do not pay your monthly EMIs, at some point your loan will have defaulted and you will have to pay additional costs and higher interest. If you have a secured loan, the lender may even take away your collateral, if you are unable to pay back the loan amount.
- Opportunity cost: If you are using most of your income to manage debts, you will be unable to save for important events, have an emergency fund, invest in health insurance, or save up for retirement.
It is very important to manage debt effectively and spend within your limits to avoid racking up debt.
Strategies to get out of debt
No one in their right mind would willingly get into debt. It is one of those things that tend to pass by unnoticed and accumulate into an impossible amount. Here’s a quick guide on the different ways you can cut costs to get out of debt.
- Stick to a budget: If you have significant EMIs to pay off every month, it is best to live on a tight budget until your financial situation improves. Make sure the budget includes your necessary bills and some discretionary spending. Note that it is not sustainable to live on a strict budget for a long time. If you have debts from multiple sources, try to conduct a credit balance transfer or personal loan balance transfer to track your debts efficiently.
- Have a rainy-day fund: Emergencies often occur without notice. If you happen to get into an accident or need a large sum of money to pay for personal expenses like weddings, consolidating debts, or indulging wants, you will need a savings account. Make sure to put away a certain sum every month in a separate account. It will come in handy even if you happen to get into debt.
- Pay your credit card balance in full every month: One of the most dangerous illusions of owning a credit card is believing that you can purchase items that are way beyond your means. Make sure to pay off your credit card balance in full every month. Space out your payments throughout the month to avoid bad credit utilization.
- Keep credit utilization low: Even if your credit card allows you to borrow a certain percentage of money, make sure not to max out the card. It is best to keep your credit utilization at 30%. If you leave your debts for the end of the month, you will possibly not be able to pay them in full. Also, only apply for credit when you need it.
- Save for big-ticket items: The biggest reason why one falls into a debt trap is not planning for their future big-ticket expenses. If you want a car, need to renovate your house, or might have a wedding, it is best to plan for it in advance. Put away money from your daily expenses in a separate account to avoid taking out huge loans in the spur of the moment. If you have bad credit scores or make too much haste, you won’t be able to negotiate better loan terms and repayment tenure.
- Check your FOIR: To avoid debt, you must keep an eye on your fixed-obligations-to-income ratio. It is a ratio that reflects what percentage of your monthly income goes into paying back debts. Ideally, you should not spend more than 60% of your total income on paying EMIs. A strict budget may not make a difference in a short while, but it is not sustainable in the long run.
- Prioritize your debt repayment: Do not keep borrowing, taking loans, and purchasing unnecessary items if you have previous debts. Focus on debt repayment. Recurring debts coupled with high-interest rates are a financial nightmare.
- Avoid unnecessary expenses: Another way to prevent debts from piling up is to focus on needs and not wants when your financial situation is tight. Stop yourself from impulse buying. Do not ever max out your credit limit or go beyond your means. Remember that credit cards allow you to purchase items with money you do not have yet but be wise when utilizing that facility.
- Check your statements often: While you cannot blame all your bad money decisions on technical errors, sometimes, it may so happen that your money got credited to the wrong merchant, or a transaction was repeated multiple times. Make sure to check your credit card and debit card statements often to check for such technical glitches. If you report it immediately, your credit card company will look into the matter.
- Consult a professional: If you are knee-deep in debt and cannot figure out a way to get out of it, reach out to a professional. The best way to keep track of a large number of debts is to transfer them on one card. If you have poor credit scores, you can apply for joint loans or collateral loans for added security. DSA agents from reputed financial institutions like ApnaPaisa would help you out. You can also head to their blog and read up on money management tips, credit card hacks, and tips to use a personal loan amount.
Discipline and commitment are the biggest pillars of staying debt-free in a capitalist society. Building an emergency fund, checking your credit card usage, and avoiding unnecessary purchases are some of the techniques you can implement to stay on top of your finances. By implementing the strategies outlined above, you can begin tackling your piled-up debt or take the necessary steps to prevent any debt and begin living a financially-stable life.