Debt starts accumulating when we start believing in the concept of buy now, pay later. Though sometimes you might find yourself in situations where it’s imperative to take a loan in order to fulfill life goals or needs, think vehicle loans or home loans. Regardless of how you end up with a loan, being in debt is a vicious cycle that effectively creates a glass wall between you and happiness.
The benefits of being debt-free clearly extend beyond the financial scope. Let us shed some light on the advantages of being debt free.
1) Live a stress free life
Debt hangs over our heads like a black cloud, increasing our stress at all times. Being constantly under the pressure of paying bills can hamper your happiness and dull your life. You’ll find yourself worrying about payments or daydreaming about the day you’re debt-free in the midst of a happy social setting or even find yourself opening the same spreadsheet with your calculations five times a day at work! This can lead to clinical stress, which affects you physically and mentally.
On the other hand, if you don’t have debts, you’ll find a happy zen with your finances, living a stress free life (at least as far as your finances are concerned).
2) Decrease your cost of living
When you don’t have debts your cost of living reduces dramatically. In other words, you don’t have to spend your income on payments of loans, interests, and other liabilities. Instead you can use that income to invest and grow your wealth.
3) Build a happy life with healthy savings
You may be looking forward to making a big purchase or even to create an emergency fund or buy health insurance. But your debts won’t allow that and instead put a full stop on those plans. Being debt free can allow you to plan for a better life where you can allocate your maximum available resources towards building a happy life.
4) Focus on yourself
Do you ever have those moments where you ask yourself: What am I doing in life? Well, it won’t surprise you to know that such thoughts are more common among people in debt. Once you’re debt free, you have the means to focus on yourself in life. You won’t spend time worrying about bills; instead you’ll find yourself using your income to renovate your home, planning gifts for a family member, enjoying a vacation, or buying a new car.
5) Open up your financial options
It is a great feeling to have money you can spend on the needs of today, to achieve your short-term goals, or to save for the future. Not having to spend tens of thousands of Rupees on debt payments allows you to open up your wallet for better financial options. Maybe you can use your savings to start a business, invest in financial avenues that increase your wealth and allow yourself the financial freedom to splurge, something which you don’t get to do often when you’re in debt.
6) Plan for better retirement security
Not having the burden of clearing your past dues in the form of debts allows you to build on your future. Having a healthy control of your finances means you can invest your money in retirement funds and insurance plans to build a safe and comfortable retirement.
If you haven’t already, you should start putting money aside for your retirement. Especially with early retirement movements like FIRE gaining ground, you want to make sure you don’t plan on a late retirement.
Does this debt-free lifestyle seem tempting? Are you stuck in the quicksands of debt, unable to figure a way out?
We can help you with some tips on how you can achieve a debt-less zen.
1) Find out how much debt you have
Before you make any plan to chip away at your debt, it’s very important to know the amount of debt you have. In fact profiling debts is a must as it’ll help you create a plan of action. Find out if you have more loan debts or credit debts and calculate the total interest amount of each. Owing money to friends and family is also a kind of debt. Though it does not accrue any interest payments, it should be a part of your payment list.
2) Prioritize Payments
Once you have a crystal clear picture of all your debts, you can start planning on payment plans for each of these debts from your income. Start by dividing your debts into three categories:
i. Highest priority – The debts with the highest interest rates and most aggressive fees and charges should fall in this category. Credit cards are a classic example that fit this category. If you have multiple credit cards that you carry debt on, understand their charges and prioritize accordingly.
Key Action Point: Prioritize payments on all debts in this category. Pay off as much as you can – striving the hardest to clear this debt at the earliest.
ii. Middle priority – For the debts in this category (think personal loans, car loans, etc) you mostly have a fixed schedule that isn’t accruing more interest every month. Or even in cases where it is, it is not as aggressive as those in the highest priority category.
Your objective with this category is to keep the payments steady but only to the minimum agreed upon. There is no point accelerating the payment of these debts if you are carrying a higher priority debt.
Key Action Point: Make sure you make these payments on time. The only task here is to not increase these debts while you’re busy fire-fighting the other category.
iii. Low Priority – The lowest priority debts should generally be reserved for any loans that you’ve taken from friends, family, or peers. You can also throw in any flexible loans that allow you to put your payments on hold for a few months for a minimal cost, without adding interest.
Key Action Point: The idea here is to reduce your payments in this category as much as possible till you have cleared the previous categories. E.g. Ask your brother for an interest free extension of 12 months on a loan that you’re supposed to pay back. Or cut your payments in half by extending the duration from 12 months to 24 months.
3) Negotiate a lower interest rate
Being knee deep in credit card debts is an unpleasant feeling. If you have a lot of credit debts then try to negotiate a lower interest rate. This tactic is especially effective if you have already paid off a large part of your debt or if the rates have been recently cut by the bank. This helps to let the bank know that you’re serious about your payments while allowing you to maintain a decent credit score.
4) Opt for a ‘Balance Transfer’
Most personal loan providers offer a service known as ‘Balance Transfer’. It’s a service which transfers your loan from one institute to another for interest rate deduction. In most cases, switching to a loan with even a small difference of 2% in the interest rates will end up saving you thousands.
For example: Let’s say you took a loan of Rs.8 Lakhs for 3 years, at an interest rate of 14%. Your monthly EMI is currently Rs.27,342. After 17 months of making these payments, if you opt for a Balance Transfer to another bank @12% interest rate, you’ll reduce your monthly outgoing by Rs.433, paying Rs.26,909/month. While this may not seem like a lot, you end up saving more than Rs.8,200 by the time you clear the loan. Definitely a worthwhile saving!
5) Debt consolidation
This is a concept that many people use to get out of debt. Debt consolidation is basically refinancing to pay off debts, opting for a low-interest alternative will help you cover the loans and structure your payments to suit your needs.
Let’s say you have an existing personal loan, multiple credit card debts, and some borrowings from friends and right now you’re struggling to cover these debts. You can opt for a personal loan with a lower interest rate to cover these payments. Alternately, for a borrowing rate lower than even the personal loan, you should opt for the group borrowing financial option that KyePot provides. Structure your dues to systematic monthly payments with a no-hassles, convenient payment option through the Android app itself.
Now you have the basic tips to help you out of debt. You should now be able to start on the plan of action to get debt free as soon as possible for a happier and healthier life. Do you have other tips that have worked for you? Let us know in the comments below!