- June 7, 2016
- Category: Debt Management
Unlike our ancestors, borrowing money is not a taboo in present times. As a matter of fact, majority of the people have no option but to take loans when it comes to at least funding big-ticket purchases like a house. Due to skyrocketing real estate prices in India, buying a house, office space, a parcel of land is just not possible without borrowing from the bank. Easy processes and quick disbursals make it convenient to take loans nowadays. Then of course, there are certain tax benefits on home loans, education loans, etc which people can avail of.
Being in debt is absolutely normal but getting out of it faster is one the best financial decisions you can ever make. Imagine the things that you can do if you turn debt-free. Imagine all the stressful money things you would not have to deal with once you are debt free. Let us examine them:
- Your cash flow gets freed up: Paying EMIs is not so much fun. And, paying them for 15-20 years is definitely not. It consumes an average 25-30 per cent of an individual’s income. When you turn debt-free, imagine the kind of cash flow you have on hand and what you can do with it. You have a healthy bank balance and you can put it to productive use.
- You don’t have to think too much about budget: You do not have to walk a tight rope between balancing EMIs and other essential financial expenses when you are debt free. Which bills to pay first? Should the bonus be used for renovation or use it towards debt? Once you are out of debt, taking other financial decisions become easier.
- Your money is yours now, not for creditors: You do not need to pay creditors each month. Whatever is left after meeting the regular household expenses is all yours. You actually get to build wealth for yourself rather than paying interest to banks. You get to invest your savings every month and grow your hard-earned money. You can take more risk and increase the equity allocation in your investment portfolio. Further, you can spend freely. You can buy things which you can pay for because of your healthy savings balance. You can use your credit card to enjoy the float. It is however important to maintain balance between spending wisely and investing your savings in a disciplined manner.
- You can do anything you want to: Once you are out of debt, you can fully focus on your essential financial goals. Not just that, you are kind of financially free to do anything you want to pursue. You can prepare a bucket list and turn those dreams into reality. Or maybe, quit your job and pursue something you love. Or start your own business. You could plan frequent vacation trips. The possibilities are endless.
Chalk out a disciplined loan repayment plan:
Generally, people do not make a conscious decision to have a loan repayment plan in place. Sadly, borrowers start repaying towards the end of the loan tenure and end up servicing EMIs through a major part of their working life. Heavy interest is charged in the initial years of loan tenure by banks. So it is essential to repay loan as much as possible in the first few years.
Take an inventory of all your loans. Start with the most expensive ones like credit card debt. Create a deadline to repay your loans. Compulsorily set aside a small portion of your income to repay towards debt. Consider it as a regular expense just like your household expenses, EMIs, SIPs and insurance premiums. Make small sacrifices if need be in the form of budget cuts. Annual bonuses, if any or sudden windfall income inherited from family should be utilized to repay as much debt as possible. Regular repayments, however small they may be, will lead to faster clearing of the loan and greater savings for the future. Small baby steps will eventually set the momentum and give you confidence to clear your debts faster.
For example, consider a home loan of Rs.60 lakhs for a tenure of 20 years borrowed at a fixed rate of 9.5 per cent per annum. The EMI for the home loan comes to Rs.55,928. If you continue the loan for 20 years, you would end up paying, 74.22 lakhs in interest, i.e., 120 per cent of the principal amount originally borrowed! If you prepay Rs.2,00,000 at the end of every year besides servicing the regular EMIs, you will be able to close the loan in 11.5 years and pay interest of 39.5 lakhs. Prepaying the loan regularly in small chunks will thus reduce the tenure and save you a lot of interest.
Conclusion Debt affects your life not just financially but also psychologically. Turning debt free gives you a liberating feeling and inner peace. You feel more confident to take financial decisions and in more control of your money. You are better prepared to face any kind of financial emergency.
No matter how much money you earn, ultimately your willingness to sincerely eliminate debt will determine your success or failure. It is a not just a financial decision, it is a significant life choice you make. Also, it is important to maintain the drive, the motivation to remain debt free. Resist the temptation to get into debt again.
What would you like to do when you turn debt free? Draw up your bucket list and share your views with us.