Do you even know if you’re in debt? Or what does debt even mean? Maybe you think you don’t have any dues but you actually do?
Debt is basically when you owe anyone money. It’s as simple as that.
Whenever you don’t make a payment in full- you’re in debt.
Loaned money from the bank to buy that car or fund that insanely huge IIM Fee?
Borrowed cash from your friend on that Girls shopping trip to buy those tempting pair of shoes at Steve Madden?
Did you not have enough money to pay your credit card bill in full?
Convinced your dad to lend you some money to buy the latest IPhone?
If your answer to any of the above is a Yes, then my friend you’re in debt.
Debt comes in different forms and sizes. Whatever it is, it means that you are at the mercy of your lender until you return it to them. It is eating into your financial freedom and impacting both your present and your future.
There are different types of debts:
Secured Debt – when you’ve given something in exchange for the borrowing. It is like taking a loan from the bank to buy a car. While you may drive the car, it is not all yours yet. If you fail to make your payments on time, the bank can take the car back.
Unsecured Debt – when someone gives you money in good faith without taking anything as a security, knowing that you will return it because you promised to do the same. Remember how your friend didn’t think twice before giving you that 2000 rupee note?
Mortgages – when you borrow money to buy a home and the bank takes your home as security or collateral. These are generally long term loans spreading over 10-30 years.
Revolving Debt – Noticed that your credit card has a maximum limit that you can borrow from and the funds are available quickly, easily and on a recurring basis?
Now that you’re aware you’re in debt, let’s see why it is important to get out of debt.
Just as money creates more money when you invest, debt creates more debt in the form of interest when it is unpaid. The most expensive of them all is generally your credit card debt.
Let’s get started on the journey to a debt free life.
- The first thing you need to do is to acknowledge your debt. Yes, I know we all run away from this because the thought of that number intimidates us. But the reality is that “What’s not measured, isn’t managed”.
Hence, take out pen and paper and make the list. Write down every single one, big or small. Yes, also the money you borrowed from your dad or your friend should feature in the list.
- Next up is to prioritise your debt. You have it all written down, total dues, minimum dues, interest rates, etc. There are many different ways to rank debt. To ensure minimal damage & build-up, you can list them down based on the highest to the lowest interest rates.
- Budget for debt repayment and allocate resources to clear the dues. Make it a part of your monthly plan and make this a priority. Evaluate your expenses and make place for debt elimination. Think twice about that salon visit for the blow dry or that meal out you sneaked in. Maybe you could say no to a drinks night out?
- Pay off the debt with the highest rate of interest. Saving more money on interest means you’ll emerge debt-free faster. However, what is most important is sticking to the list and having the commitment to clear the debt be it in any order.
- Remember to set aside some money every month towards savings. Yes, even if your main goal is to pay off the debts, you must not forget the savings fund. Put aside savings in your emergency fund or invest it and watch money make money. This will prevent you from taking additional debt.
- Focus on paying off one debt at a time. If you try to focus on all at once, you are reducing the impact of the repayment as interest is still being incurred across all debts. You will also be motivated as your clear off one item after another.
- Set mini milestones and celebrate when you achieve the goals. Go out for a movie, or grab a meal at your favourite pad, if you managed to clear your credit card debt. You must celebrate your wins before you move on to the next.
- Once you’ve reached a stage where all your money is truly yours (yay!!!), make a commitment to having a debt- free life. Being debt-free will allow you to build wealth and take control of your finances.
- And oh don’t forget to set aside additional amounts towards savings, because hey we know you have that money. You just managed to pay off all your debts after all.
A debt free life is a marathon that’s won through discipline and consistency.
“Nothing happens without focus. Don’t try to do everything at once. Take it one step at a time” – Dave Ramsey