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How To Manage Debt?

Mr. C.S. Sudheer | Updated On Wednesday, September 26,2018, 03:25 PM

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How To Manage Debt?

 

 

This is a famous saying by Ogden Nash, “Some debts are fun when you are acquiring them, but none are fun when you set about retiring them.” Yes, once you fall in the debt trap, there is no way back. The trick to escape from a debt trap….just don’t fall into the debt trap. How can you do this? Simply learn how to manage debt.

Managing debt is not difficult. All it takes is discipline, a little financial knowledge and the will to overcome and manage debt. IndianMoney.com believes that the dream of a developed India is possible, only when we achieve 100% financial literacy. Just leave a missed call on IndianMoney.com financial education helpline 02261816111 or just post a request on IndianMoney.com website.

Understand your financial situation to manage debt

The first step in debt management…. Know who and how much you owe. What does this mean? Simple, it’s just being self aware of your financial situation.

  • Understand your financial obligations, (To whom you owe money, say the bank or a financial institution and how much you owe).
  • Take responsibility for paying back debt/loans you owe.

Be a smart borrower. Never borrow more than you can repay. This is when you hear your elders in all their wisdom saying, “Don’t live beyond your means.”

Follow this simple thumb rule:

  • Taken a car loan? Make sure your car loan EMI’s, do not exceed, 15% of your net monthly income.
  • Taken a personal loan? Make sure your EMI’s do not exceed, 10% of your net monthly income.
  • The EMI’s you pay for all your loans combined, should not be more than 50% of your net monthly income.

see also:Investment Options for Senior Citizens

Never borrow to splurge

Love shopping and the good life….tempted to blow all your money shopping? Go ahead….But use your debit card to shop. Now there’s a problem…..What if your bank account runs dry? Well….this is a wake-up call. Why shop when you don’t have the money? You’re tempted to take out that credit card, swipe it, buy whatever you want.

 Credit card = Borrow now, pay later.

Yes…credit card charges you interest on the money you borrow, which can go as high as 2-3% a month. This is when you must remember the famous saying, “If you buy things you don’t need, soon you will have to sell things you need.” If you use the credit card, mindlessly shopping and buying things you don’t need, you will soon fall in the debt trap. You will be unable to repay the outstanding dues, on your credit card.

When should you use a credit card? Credit cards have a billing cycle + grace period, within which you have to repay the borrowed amount. Billing cycle is around 30 days. The grace period is around 10-15 days. You do not have to pay any interest, on the amount you borrow using the credit card, if you repay within billing cycle + grace period.

Remember: Shop using your credit card, only if you are confident of repaying the borrowed amount, within the billing cycle + grace period. If you fall behind in your repayments on credit card, your cibil score would go down. You will not be able to avail another loan, from any bank/financial institution.

See Also: Types Of Credit Cards

Substitute high-cost loans with low-cost loans

Availed too many loans and struggling with repayments? You have to consolidate all your debts. How to do this:

Step 1

  • Make a list of all your outstanding loans, (loans you have to repay). This includes both, high cost loans and low cost loans. Confused what is a high cost loan? Simple…This is an unsecured loan (loan without collateral), such as a personal loan or a credit card. You get the benefit of no collateral, but you have to pay high interest. Now what is a low cost loan? This is a secured loan (loan against collateral). You are charged lower interest for a secured loan.

Step 2

  • You need to substitute all high cost loans, with low cost loans. Identify high cost loans such as personal loans and credit cards. A personal loan charges interest of around 16-22% a year. A credit card charges interest of around 24-36% a year. You need to substitute these high cost loans, with loans which charge lesser interest (secured loans).

Step 3

  • Substitute personal loans, with a secured loan such as loan against property, gold loan or even a loan against a fixed deposit. Repay credit card dues with these secured loans. If you can, prepay a personal loan or prepay outstanding credit card dues. You can save on high interest payments. If you get a raise in salary or an annual bonus, use this money to repay high-cost loans.

“Interest on debts grow without rain.” You may be tempted to invest money, instead of repaying your loans. You believe you can repay loans, with the returns on the investment. A very bad idea… There is no investment, which can give you higher returns, than the interest you pay on a high-cost loan. First, repay loans….then worry about investments.

 

 

 

 

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Article Author

Mr. C.S. Sudheer

Mr. C S Sudheer is the founder and CEO of IndianMoney.com – India’s largest Financial Education Company. He started his career with ICICI Prudential Life Insurance and later on worked with Howden India. After his brief stint in Howden India, he moved on and incorporated Suvision Holdings Pvt Ltd which is the sole promoter of IndianMoney.com. He aims to build a nation that is financially literate with investment savvy citizens.

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