If you are in debt, then with proper planning and execution, you can become debt free in no time. Here are some tips to become debt free as early as possible.
Having debt does put a strain on not only our finances but also our mental well-being, which is why it's crucial to take steps to become debt-free and alleviate the burden of financial stress
If we are too much into debt, we are always anxious and thinking or arranging money to get rid of the same.
However, in such situations, we often fail to realise that with proper planning, we can become debt free. How? Let’s see!
Tips to Become Debt Free while Maximising Our Savings
If we are in our late 20s, then becoming debt free by our 30s is what we should aspire for. The same goes for people in their 30s or late 30s.
We can go debt free by the 40s or even our mid or late 30s if we do proper planning and stand by our plan.
Here are some of the most effective tips to help us become debt free:
1. List and Prioritise
It is the foremost step for becoming debt free – PLAN.
We should list down all the debts that we have piled up and start prioritising them.
The key is to repay the debt with the highest interest rate and then go down to the least interest-charging debt.
If we have credit card debt, we know where to start our repayments. Credit card debt attracts interest anywhere between 24%-36%. They burn a big hole in our pockets; therefore, it is important to repay them on priority.
2. Bifurcate our Income
Once we get the list of debts, it's time to jump on the income side.
We need to allocate our income to different heads. This includes allocating it to our daily expenses, debt repayment, savings, and investment.
Try to allocate a maximum towards debt repayment till the time we have at least repaid the high interest charging debt.
If we feel comforted that some extra cash is there in our bank, then the harsh truth is – banks are providing us with an interest of hardly 2.5%-3% per annum while we are paying an interest of 10%-36% on our debt.
It’s better to utilise the excess money for debt repayment. As the saying goes - each penny saved is a penny earned.
3. Negotiate for Lower Interest
While we are ready for repayment, why don’t we use our negotiation skills to lower the interest rate further?
Pay a visit to our lender and renegotiate the terms of lending. We can request a lower interest rate, and if everything goes as planned, we might save some extra money on the interest cost.
4. Balance Transfer
If our credit card debt is huge and we don’t feel full repayment is possible in the near future, consider the balance transfer facility if we have multiple cards. If we have a balance transfer credit card, then it’s a cherry on the topping.
Balance transfer credit cards offer a lower interest rate than regular credit cards.
However, we must ensure that we balance transfers only on cards with a lower interest rate.
5. Work on Side Hustles
Well, debt repayment will become easier if we can work on some side hustles.
This will allow us to generate extra income that can further be channelised for debt repayments.
A side hustle could be anything like using our skills to generate an additional income, a small side business etc.
6. Emergency Funds and Savings
While we focus on debt repayment, it is important not to forget about savings and investments.
It begins with an emergency fund. Uncertainties can knock on our doors anytime, so we must maintain an emergency fund.
An emergency fund should normally cover six months of our expenditures.
If we only concentrate on debt repayment and forget the emergency fund, in case of a mishap, we will increase our debt instead of decreasing it.
Another important aspect is to allocate a portion towards savings and investments. This will ensure that while our debt is reducing, our assets are also increasing.
Advantages of Being Debt Free
Well, being debt free certainly has a lot of advantages. Following are some of the benefits of being debt free:
- We are mentally free and relaxed and don’t owe any money. It brings in the sense of freedom and independence.
- We can allocate our income to enjoy our life and fulfilling our long-held desires truly.
- We can save and invest a lot and create a huge retirement corpus. Further, being debt free also allows us to retire early. Once we achieve our retirement corpus, we don’t have to work to earn.
- We can have a good credit score if we don’t mess up our finances and debt. A good credit score makes it easy to get loans in the future at reasonable rates.
Disadvantages of Being Debt Free
We might think about what could be the disadvantage of being debt free.
Well, prima facie, there is no disadvantage of being debt free, but a certain amount of debt is fruitful. This includes:
- Timely debt repayments help increase the credit score.
- We can leverage using our debt. For instance, if we purchase anything at debt or no cost EMI, we can delay our money's immediate outflow to future periods. We can use that money to invest and earn returns, while debt helps us delay the expenditure.
- Debt is useful for big purchases like homes, offices, and education.
In a Nutshell
While becoming debt free is the most relaxing state, debt is not that bad if we learn to use it wisely for our benefit. However, we need to ensure that we don’t fall into a debt trap by piling up excessive debt. It’s all about how we manage our income, expenses and debt that determines our financial stability and security. If you are in a debt trap, use the above steps to get rid of your debt as soon as possible.
You can automate your savings and become debt free. To automate your savings, you can use the daily savings app by Jar, which allows you to make digital gold investments starting at just Rs. 10. Take your first step now!