Staying out of debt should be your paramount obsession. It has become mine over the last few years. Last year, a personal situation left my financial plans in tatters. The unpredictable nature of life had hit me in the face.
The only reaction I could think of, while still reeling under the impending demands, was to cut back on my own avocations. From eating out every weekend to making off-the-cuff vacation plans, my wife and me consciously decided to cut back on these discretionary expenses or at least, the items that lay well within our control.
But then, you know this is a difficult heist to pull off. Eventually, no matter how hard you look away, you always end up giving in to temptations. It’s not always possible to avoid that trip to shopping mall and buying stuff that you don’t need right now. You know what I mean. So, I started wondering what if I could devise a system, an automated system wherein I don’t have to mentally fatigue myself pondering over when to rein in myself and when not to. A system that would not only free up my time, but save me money both in the short-and long-term.
By adopting these methods, you don’t have to cut down on your lifestyle or Starbucks Lattes. You only have to become a more informed spender. See, there is a pretty thick line that separates informed spending from extravagance. As long as you stay within your monthly budgets and keep your eyes and ears peeled to what comes in and what goes out, everything will be fine.
1. Pay down your credit card bills. Don’t fall into the trap of Minimum Monthly Payment. It’s a system that works well for the banks, but not for you. Bankers know the magic of compounding better than an average Joe. At 3.5% interest on balance payment every month, the banks’ receivables column swells up every month.
Insist on paying the monthly outstanding amounts in one go. You will save yourself both time and unnecessary pain later.
In this context, I love my American Express Gold Card. Amex doesn’t give me any leeway, I don’t get anything like Minimum Amount Due in my card statement. Either I pay the whole amount or they dock my points.
The last thing you need to do is to put your monthly payments on auto-pilot. I have linked my Amex with my savings bank account so that I don’t have to bother about the deadline dates and telecallers. You might have to fill out a direct debit enrolment form, but it’s just a one-time hassle and totally worth it.
2. Track your monthly expenses. Somebody once said,”Good habits are as addictive as bad habits and a lot more rewarding.” Tracking your daily and monthly expenses is one such good habit.
You no longer have to maintain a diary or a bunch of A4 sheets, that’s downright old-fashioned. Simply, download a good expense tracking app.
I use Walnut to keep tabs on my expenses. Walnut reads the SMSs that you get from banks and credit card companies and basis the information, helps you make sense of your spends through beautiful, comprehensive charts.
3. Reduce the bad debt first. In my dictionary, credit card debt, interest on car loan, money borrowed from loan sharks, etc. all fall into bad debt category. Debt you should repay sooner than later.
In case you get an unexpected windfall, use it to wipe off your bad debt. Don’t even think of spending it on fancy stuff and gizmos if you are saddled with loans. Normal human tendency is to go for the cool stuff and let the debt run its course. Wrong idea.
The gratification you’d derive out of zero credit card debt or reduced car loan amount will last much longer than out of new gadget purchase.
4. Manage long term debt. The typical home loan tenure in India is 20 years. Since the loan duration and interest rates determine the monthly outgo, and the latter are not in their control, people tend to go for longer tenures to keep their EMIs (equated monthly instalments) low. All the while thinking that they are saving money by paying lower EMIs.
Let me explain this through an example. Let’s you have taken a home loan of ₹24,00,000 @ 9% interest for 20 years. Your monthly instalment comes to ₹21,500 for the next 20 years. By the time, you repay the loan, you will have paid an interest of ₹28,23,425 in addition to the principal of ₹24,00,000. Now if you hike your instalment a little, from ₹21, 500 to ₹23, 500, your loan tenure goes down by full 4 years to 16 years and interest over the loan duration reduces drastically, too, to ₹21,67,460.
See, you are not going to be earning the same money as you did when you took that home loan. Over the years, as your income goes up, I suggest you speak to your bank and increase your EMI. Not only are you going to save extra money in interest but you are also expanding your debt-free years.
5. Forgo your credit card for some time. If you have managed to repay your credit card debt, I suggest you give your cards a little rest. Pay in cash, use your e-wallets or simply, your debit card whenever required.
The idea is to make yourself live within the means. We sometimes tend to go overboard with our card spending, a hiatus of 3 months will settle you into a new life where you only spend what you have.
6. Build a productive asset. Get out of the toilet one step at a time, you know. As you keep a hawk’s eye on your debt, make some wiggling room to build an asset. I am not talking of big investments. Start small. Make room for a counterbalance to debt.
Start with an investment in an equity mutual fund. Put it on auto-pilot (SIP mode) so that every month a fixed sum goes directly to your mutual fund. Like I said the amount could be as small as ₹500. Let the compounding work its magic.
Trust me, you’d love the unparalleled sense of liberation that comes from watching your money grow. It’s amazing.
Finally, I believe that most of our bad financial habits stem from our tendency to not act on time. Hence, the only ingredient you need to inculcate in yourself is ‘discipline’. By adopting a few or all of the above methods, you can skillfully manage your debt problems.
What are the actions you are taking to steer clear of debt? Is there anything that has worked wonders for you? Do share your experiences in the box below.