Lead a Debt free life

We all dream to achieve our multiple goals in life of buying things such as cars, home and other luxuries by a combination of our own funds and borrowings. Sometimes we go overboard by stretching our budget too far than what we can afford.  

Given below are a few checkpoints that could keep your lives stress-free and eventually make you debt-free even when you are comfortably positioned to achieve your goals.

• Understanding how much debt /leverage you should take while planning to buy your home/car/holidays
• Planning your finances that lead you to become debt free?
• Learning to manage your home/credit card or personal loan account

Here's how you could go about achieving a debt-free life; this is however not an overnight thing. It has to be executed in phases and it will take time, focus to ensure that you reap the desired results.

Assess your problems

This becomes absolutely pertinent to start off on your goal to achieve a debt-free life, it is also important from the perspective of doing some damage control. When things go awry, there is an immediate need to plug the leaks even before digging deeper to analyse the situation.

As part of the problem assessment stage, you will be required to jot down:

• Who do you owe the money to?
• How much do you owe?
• What is the interest rate across each of these loans?

While you do this exercise, you may also make a mental note of which ones to plug first -- the one with the least outstanding amount and with the highest rate of interest should be on your priority list. For example: Credit card overdue, personal loans should be the first ones to knock-off your list.

Change your lifestyle

If you overspend as a habit, it may be time to change your lifestyle. Keeping tab on your expenses can go a long way in enhancing your savings, which can in turn be routed towards loan closures.

Swiping your card may be the easiest thing to do at the petrol bunk, grocery store etc., but as a policy try to use cash for smaller purchases, this will help you keep a tab on how you use your credit card.

It may also help your create a budget and stick to you it in the long haul.

In the wake of getting some luxuries, you could have gone overboard with your EMIs, you may need to conduct a financial feasibility to ensure that you do not have to compromise on your basic needs. On a thumb rule basis, your overall EMI commitment should not be more than 30 per cent of your net earnings.

Need versus want

When you need something, you should have it -- when you want something, you can have it but you can do without it as well. Need arises from necessity, wants arise from desires.

This is a primary question that you should answer while you do your shopping and when you avail your loan as well.

You may aspire for a high-end gadget, although you may not be able to afford the same. This would lead to a scenario, where you borrow and burden yourself with a loan liability, despite the fact that the individual could definitely survive without the product under consideration.

This is a typical situation especially amongst the newbies who land up in jobs with attractive pay packets. There are however, others as well who feel a sense of pride by owning the latest gadgets etc., and they too get caught in a debt trap.

Itemise your highest interest debts

These are typically your credit card overdues, personal loan, car loan -- ones you should gun to pay-off at the earliest, you can choose to make withdrawals from your savings/investments (liquid funds, term deposits, mutual funds etc.,) and lower the monthly outflow.

This can in turn be routed towards some short-term investment plans which can be pulled out to do a pre-closure on another debt with a high interest rate. This will allow you see your progress faster, and will make you feel good after each smaller debt is paid off.

Review your finances thoroughly, crunch the numbers, and see which method would be the most effective for your situation.

Don't borrow to close your outstanding loans

It may seem tempting to borrow at a lower rate to close the loan with a higher rate, but you are only getting into a vicious debt trap, avoid this to the maximum extent. Borrowing interest free amounts from relatives, friends may be a more viable option.

Final word

Paul Clitheroem once wisely quoted, "There are plenty of ways to get ahead. The first is so basic I'm almost embarrassed to say it: spend less than you earn". So true in more than one ways, if only we could satisfy ourselves within our earnings, then this world would be debt-free and ofcourse, many would have to shut down their businesses.

But, on a serious note, any debt should be assumed only after prudently considering financial feasibility.

Key takeaways...

Assess the problem, conduct some immediate damage control

Change your lifestyle, curb your spending habits

Use your credit card prudently

Ascertain whether you need it or want it spend only if you need it

Prioritise your debt and close them out starting with the highest interest rate / lowest outstanding amount

Courtesy: Rediff

Thanks : Anil Rego (In the second part of the 'I Dream' series Anil Rego)

In the first part of this series he explained how you could become a millionaire by 30!