Marathon to Debt Free Life

Written on Wednesday, March 16, 2016
By Priti Gaur

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According to Maslow's Hierarchy Model of needs, the basic needs of a human being starts with shelter, food and water and later when he attains these, he proceeds to belongings, self-esteem and self-actualization. Now we live in a society where people are fascinated towards luxury lifestyle, big cars, and big homes, masses are so mesmerized with such things that they are ready to take a huge sum of loans from banks even on high-interest rates.

Although there is a huge difference between “Want” and “Need”, people are unable to differ it and are ready to take a risk in their life to fulfill both at the same time. They almost live half of their life just in paying EMI's. Thanks to the consumer friendly saving alternatives available in the market, which promote people to do monthly saving & investment in order to build funds for repaying their loans early. Before discussing further about the path which could guide you to become debt free, lets quickly understand the loans on the basis of interest rates and risk involved in it.

Secured loans are those loans that are protected by an asset or collateral of some sort. The item purchased, such as a home or a car, can be used as collateral, and a lien is placed on such item. The finance company or bank will hold the deed or title until the loan has been paid in full, including interest and all applicable fees. Other items such as stocks, bonds, or personal property can be put up to secure a loan as well.

Examples of Secured Loans:


      Mortgage
      Home Equity Line of Credit
      Auto Loan (New and Used)
      Recreational Vehicle Loan

 

On the other hand, unsecured loans are the opposite of secured loans and include things like credit card purchases, educational loans, or personal (signature) loans. Lenders take more of a risk for making such a loan, with no property or assets to recover in case of default, which is why the interest rates are considerably higher.

Broadly people who are in debt don’t really understand the essence of compounding interest. When you borrow loan the power of compounding works for Banks and if you are saving & investing whatever you can, this is just in reverse. Let us take a hypothetical example of an individual carrying Rs. 10 Lakh Mortgage Loan and Rs.7 Lakh Car Loan and Rs. 50,000 Credit Card loan. The interest rate will vary in every case as Credit Card loan has higher interest rate compared to all other loans. The first priority is to save for loan-repayment which has a high-interest rate, although it's your call that you are going for snowball method or High-Interest Rate Method of Repayment of Debts.

Strategies to become debt free: Before you start your run to become debt free, it is essential to list out all your inflow and outflow of cash (i.e. monthly budgeting). Now start listing out your monthly budget of expenses and how much you are left with, from that amount how much you can save & leave remaining to build emergency cash. It is not indispensable that jointly every individual would be having enough cash after paying all EMI's and meeting their primary expenses of life. There is numerous plan of action by which an individual can raise a fund to start saving through short-term investments.

The second step which may help you to raise some extra cash is by reducing your daily, weekly and monthly expenses, we are not saying to reduce anything what you really need but you may like to avoid impulse buying, adding unnecessary luxury to live for a meanwhile till you become debt free or, at least, cut down your EMI's & loans a bit. You can reduce your expenses by decreasing anything which is unwanted that could be the number of outings, eating outside food, slightly reducing luxury to live.

The third step, which could lead you to live debt-free life, is exploring your inner talent. Everybody has some or the other talent within themselves and sometimes it is crucial to know what extra you can do to earn money in critical cases of life, maybe it's teaching, taking dance or yoga classes, working for extra hours in the office, freelancing jobs etc. which could increase your monthly cash inflow. As Benjamin Franklin said, “A Penny Saved is a Penny Earned”. Such amount should not be spend & should be combined with all other strategies to raise money that in a collective manner can be saved into SIP's in Mutual Funds, Recurring Deposits, Fixed Deposits etc. Contact your Financial Planner for more details to save wisely.

Now, the question arises that will it be enough to build the lump-sum money to repay the loan? If we calculate our one-day expenses from waking up from bed to going to bed, we will find there are fewer expenses that can be ship-shaped. Let's take one more hypothetical example and discuss fourth step for debt-free run, assume that you are living in cluster family, and you pay monthly for four Newspapers – two for yourself & two for your parents, two digital TV Connections – one for yourself & one for parents, Gas Connections, Electricity Bill, Water Bill, Internet Bill, Land-line Bill etc. All you need is little trimming from your expenditures, by reducing what you don’t need much.

You need perseverance, patience and motivation: Fifth step is discussing such anxieties with your family and coming up with new cognitive content to increase your cash inflow, combining family members to your goals could lead you to success. Reducing debt is a long journey that takes discipline. Whether it’s setting reminders on your calendar or setting an alarm on your phone to alert you to pay bills, anything you can do to trigger your mind about your path to financial freedom is encouraged and sometimes necessary.

There are several EMI calculator tools available online which provides monthly and year wise information about interest & principle paid and left, or you may like to request for Financial Year statement from your respective bank. Be calculative for the amount you wish to raise; you may like to repay the loan to reduce the number of years of loan tenure or may be reducing your EMI amount. Calculating such figures could provide you a chance to save with a goal and gives a clear picture of your financial arrangements of future.

 

Smart Takeaways -


You may also like to generate extra cash by getting rid of unwanted and old furniture, which is kept in your storeroom by selling it online or offline.
You can also car pool with your friend or colleagues or you can use public conveyance for office instead taking your own vehicle (Car or Bike) in case if you are facing tough stages financially, as it will simultaneously reduce your fuel & vehicle parking cost.
You may like to take home cooked food to the office to reduce you daily spending on lunch, it helps you to stay healthy at the same time.

Wealth creation is not only saving, it’s also saving every coin possible and investing it wisely with set goals. There is no rocket science for any social class when it comes to saving & investments. Rules are quite similar for everyone and only goals are something which differs from person to person, as the power of compounding applies to all and everyone can reap the benefits out of it to run on the road to debt freedom. “You must learn to Save First and spend afterward – John Poole”.

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