Are you drowning in debt and don’t know how you’re ever going to pay it off? Don’t worry, you are not the only one in this situation. For the benefit of many such people, we are going to cover exactly all this in this post – Debt Management and How to Pay Off Your Loans Smartly
Debt Management and How to Pay Off Your Loans Smartly
Being in debt has a lot common with getting into the quicksand. Initially it seems easy that you would be able to pay off the loan with a little effort. But harder you try, more you keep getting into the debt trap. Not only that, but we want to pay off our loans fast, in the quickest, cheapest and most efficient way possible, so that we don’t waste any money on exorbitant and ever increasing interest.
1. Know your loan liabilities
The first step in debt management is to take charge of your own financial planning. As a first step, list down your debts by the interest rate charged on them. In ascending or descending order, list your debts or loans and liabilities by interest rate. This includes all types of loans taken by you such as Education Loan, Personal Loan, Credit Card Loan, Home Loan, Unsecured Loan, Secured Loan, Car Loan etc.
Next step would be to pay off your loans, one by one – starting with the one which carries the highest rate of interest. Usually the rate of interest charged for different categories is as follows:
Home Loan 8.3%
Car Loan 9%
Education Loan 10%
Personal Loan 20%
Credit Card Loan 32%
Naturally, with every passing day, you would be increasing your debt burden and amongst these, the Credit Card Loan and Personal Loans are the killers of your peace of mind. Therefore, pay them off first. If you do not having adequate finance or bank balance, you may continue to pay the EMIs of other loans.
2. Clear off your debt by paying higher EMI
Let us try to understand this with the help of an example. Suppose you owe Rs. 50,000 to the lender under the unsecured loan category and it has been agreed that you will pay off the amount + interest over a period of 3 years and the interest charged is 20%.
You would be paying EMI of Rs. 1,858.18 for 36 months. Thus total amount payable by you would be: Rs. 66,894.48. Hence total interest component would be: Rs.16, 894.48
Now let us assume that you increase the EMI value to about Rs. 2,577.79. In this case, total amount paid by you would be: Rs. 61,074.96. Hence total interest paid would be: Rs.11,074.96. This way your total loan liability would be paid off in 24 months and also you would pay Rs. 5,800 less interest.
Now let us assume that you increase the EMI value to about Rs. 4,631.73. In this case, total amount paid by you would be: Rs. 55,580.76. Hence total interest paid would be: Rs.5,580.76.
Therefore, you achieve a saving of Rs. 11,300/- in interest by increasing the EMI amount. Besides, you would clear the loan liability within one year.
3. Sell what you don’t need to finance some EMIs
We now need to get smarter with our financial planning for debt management. Warren Buffet, the famous investor who figures in the list of top 5 richest persons in world says, “If You Buy Things That You Don’t Need, You Will Have To Sell Things That You Need.”
But we still keep giving in to the temptation of buying things that we don’t use regularly. Just look around your house and you will find many items that you have not used in the last 6 months to 12 months. Also there are good chances that you may not use them in future also. For example, it could be mobile phones, tablets, camera, luxury watches, laptops, computers, expensive bags, furniture items and the list could go on.
So gather them, make a list of these items and go online to sell them. Of course, you have to be prudent and detached while putting them on sale. It is hoped that you would be able to generate enough cash, may be good enough to pay for 3 to 4 EMIs.
4. Restrict your purchases till you pay off all your debts
For the next few months or years, while you are paying off your debts, manage to live well within your means. This means buy those assets only which are going to increase in value (appreciating assets).
Stay away from buying liabilities. For example, you decide to buy a car by taking a car loan. Even if you somehow manage to buy the car against one down payment, it is still going to depreciate in value plus you will be paying for insurance, road tax, parking, fuel and regular maintenance.
Recommended reading: How to Save Money on Car Insurance
Second category to avoid is the temptation to buy unnecessary objects or services. The example could be another fashionable pair of branded jeans, while you already have quite a few in your wardrobe or dining at an expensive up-market restaurant.
All this has to avoided, at least temporarily – till you become financially stronger again.
To help you identify such expense heads, we give below an indicative list:
- Travel and Holidays
- Unnecessary Monthly or Annual Subscriptions
- Depreciating Assets
It is hoped that by cutting down on above expense heads, you may save as much as 20% to 30% per month and naturally it should be used to pay off your debts faster.
5. Use Secondary Income to Pay Off Your Debts
It is quite possible that your spouse is working. In that case, you should try to run your household from the primary income while use the secondary income in full to pay your EMIs. It is quite possible that your spouse is not working, in that case one or both of you can do some freelancing jobs from the comfort of your home.
In the following articles, we have shared many ideas and techniques for you to generate extra income:
- Best Passive Residual Income Ideas
- Best Work from Home Ideas for Housewives
- Best Freelance Writing Sites To Get A Job
- Easy Ways to Earn Money through Internet
There could be another situation that you are not married or are divorced. In that case, please refer to How to Earn More Money in Career or Business
6. Create a corpus fund to avoid borrowing
The most ideal situation for anybody would be to do away with the need to take a loan ever. Aim to create a corpus fund for any kind of need in future including emergency. This would have to be created from your savings. Even small monthly savings would grow into a decent size, provided there are regular monthly savings and they are invested sensibly. As the time passes, you would marvel at the size of the fund at your disposal, thanks to the power of compounding. This means that besides principal amount, even the interest will earn interest.
It is important that you consult a professional financial advisor and seek regular investment advice.
This is called the passive income generation.
7. Become Budget Conscious
As long as you are living within your means, you shall never get into debt trap. Know what your earnings are, know what your needs are for which you need to pay and balance the two. In fact, there is a third important component and that is regular savings.
Ideally, you should set aside at least 20% of your monthly earnings as savings and then plan your life style around 80% of your income or an amount less than that. A good budgeting exercise should be based on data and done intelligently by rising above your emotions and habits of compulsive shopping or a need to show off.
This would keep you always happy, tension free, healthy and confident.
Also this is a pro active approach under smart financial planning to avoid falling into any debt trap.
Good books to read on the related topic:
- Manage your Debts (Loans & Credit Cards)
- Financial Planning for Doctors
- How to Get Out of Debt, Stay Out of Debt, and Live Prosperously*: Based on the
- Proven Principles and Techniques of Debtors Anonymous
- You Can be Rich: A Practical Guide to Financial Planning
- Financial Planning for the Newly Married
Other recommended articles for you:
- Motivating Quotes About Getting Out Of Debt Trap
- How Rich Become Richer
- How to Use Credit Card Sensibly
- How to Use Credit Cards to Your Advantage