Few tips to master the art of debt-free living 

5 MinsNov 04, 2022

In this era where loans are easily available -- for various purposes (buying a house, a vehicle, an expensive gadget, a foreign vacation, education, wedding, emergency needs, etc.) -- most of us have debt obligations. Availing of a loan is not a bad thing per se, as long as you borrow responsibly. If all the EMIs on your loan exceed 50% of your Net Take Home (NTH) pay, you do not have sufficient savings, are borrowing money to meet regular expenses, are unable to pay credit card bills on time, default on loans, etc.; then these aren’t healthy signs. It’s time you considered reducing your debt burden.

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Here are a few tips to master the art of debt-free living:  

1)Keep a check on spending habits, particularly on credit - Don’t get lured by the ads you see. Think it through if you really need a product or service, and whether it would be worthwhile to -purchase it through a loan or by swiping your credit card. If it is for an investment, such as buying a house, or education -- which would prove valuable over the long run -- maybe you can consider availing of it (provided it is at the best terms and conditions). - However, if the loan is being used to buy an expensive smartphone in order to impress someone that may be a bad idea.

2)Payoff as much debt as you can - If you really wish to lighten your debt burden, repay as much debt as possible, i.e. prepay the loan. In this exercise, pay close attention to debts with a high interest rate that have lingered for a long time. You may consider utilising windfall incomes or annual bonuses or disposing off your dud investments/assets, which may help reduce your debt burden. And after having done this, if there is still a loan outstanding, don’t miss your regular EMI payments. This would help you avoid the interest thereon and penalties.

[Also ReadHow to avoid credit card debt?]

3)Debt consolidation and restructuring may also be an option, allowing you to reduce the number of loan accounts while accomplishing the following:

  • Save hard-earned money from high-interest outgoings
  • Put an end to nagging collection calls
  • Simplify the repayment of loans (bringing down the total EMI on your loans below 30%-40% of the NTH pay), and
  • Potentially improve your credit score

In the case of certain loans, such as home loans and education loans, you may renegotiate the terms of the loan by genuinely expressing your difficult situation. Maybe the bank and its credit counsellor can offer you a solution. If renegotiations of the terms of the loan work, it is a win-win situation for you and the bank.

4)Avoid taking a new debt - A new debt, especially if its quantum is high, would only pull you into a debt overhang situation. Thus, while you are aiming to reduce your debt burden or live a debt-free life, make a conscious effort not to avail of fresh loans as much as possible -- particularly the ones that aren’t facilitating you to build an asset that appreciates. Plus, control certain lifestyle expenses on credit cards, viz., dining out often, holidaying, shopping, etc. On the contrary, increase your monthly earnings by diligently engaging in a prudent budgeting exercise, alongside finding an additional source of income, which may be monetising your hobby, a side-hustle (part-time consulting, free-lancing, giving tuitions, etc.), and /or letting out a property on rent. Doing so may help you repay the debt sooner.

Keep in mind that being conscious of how you manage your personal finances, will protect you from adverse consequences and be in the interest of your family’s financial well-being. Thus, maintain a healthy debt-to-income ratio.

Disclaimer: This article has been authored by PersonalFN, a Mumbai-based Financial Planning and Mutual Fund research firm. Axis Bank doesn't influence any views of the author in any way. Axis Bank & PersonalFN shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision.