ABHISHEK DEV explains debt management and how one should spend judiciously to avoid debt traps.
In today’s day and age, debt management assumes even greater importance. There will be very few of us who can claim to be totally debt-free given this EMI-driven world. Today you name what you want – there is a loan for it. It is not just homes or cars or scooters. Want to buy a fridge? A new mobile phone? There’s a loan for that too!
While we indulge in whatever we need, procured with the loan money, we then realise that the account gets depleted very quickly as the EMIs are deducted – and before you know it, you need another loan to tide over the rest of the month!
What is Debt Management
Debt management is one of the most important pillars of financial planning. As stated earlier, almost everyone today has some form of debt or the other and the same has to not only be factored in while making a financial plan, but also actively managed and optimised so that while the debt is being repaid – the overall investment for achieving our goals is not compromised. E.g. if Rita has received a good bonus at work and wants to buy a car – should she put the entire bonus as down payment for the car, thereby having a low EMI to pay off? Or should she pay the minimal down payment and invest the rest of the bonus? A lot will depend on Rita’s existing financial situation, her risk appetite and time horizon for her goals.
All this needs to be considered before taking a decision on the extent of down payment for her new car.
Beware of the Silent Killer
There is a ‘silent killer’ as far as your debt is concerned and that is your beloved credit card. While it is super easy to simply swipe it and buy whatever we need at ‘low-cost EMI options’ it is always better to ensure that we swipe within our means and are able to pay the full amount of the bill at the end of the cycle.
Typically cards charge an interest of 2.5-3.5% on outstanding balances per month – that’s more than 34% if annualised! Shocking isn’t it!
So yes, by all means swipe away but ensure that you clear all your dues in that month itself.
Managing your Debt
If you are finding hard to manage your debt, then one good way to go about untangling the web is to see which loans are the smallest and pay them off first.
Start from the quick wins first and then move on to the larger loans. There is also another approach which is to offset any windfalls or bonuses against the largest loans taken. There are many ways to manage your debt. Get in touch with a good wealth manager who could help you in managing your debt better.
It is very easy in today’s fast paced, internet driven world to spend money either with a swipe or a single scan and click on the phone. The idea of sound financial planning is not to blindly curb spending but to spend judiciously so that the mountain of debt does not become an insurmountable climb.
Again, take the expert advice of a good wealth manager who could guide you on how to manage your debt and make the climb easier.
