5 steps to live a debt free life

Most people take loans for almost everything they want to buy but are unable to pay cash immediately. The burden of EMI starts as soon as you take a loan to buy a new house, car, start or expand your business, pay for education, monthly bills, medical emergency and even before you realize, you feel caught in a debt trap. If you worry about your bad debt-to-income ratio, below are the five steps that will help you manage your finances better and live a debt-free life.

1. List down all your debts:

To move out of the debt trap, you need to first take stock of all your loans. It could be home loan, personal loan, car loan, education loan, loan from FD, insurance policy, advance salary or credit card dues. For every loan you need to exactly know how much you owe, the present interest rate, EMI and the period of loan.

2. Understand and bifurcate your debts

There are two types of debts – good and bad (not-so-good). Home loan, personal loans for education, medical emergency, business loans are examples of good debt. These loans might cause you inconvenience for a short period, but it is an investment and helps you to improve your financial position in the long run. On the other hand, paying exorbitant interest rates on credit card bills is an example of not-so-good debt.

Your second step to move out of a debt trap is to classify your loans as good and bad (not-so-good).

For instance, you have taken a home loan of Rs.20 lakh, personal loan of Rs. 4 lakh, and credit card bill of Rs.1 lakh, you should start paying the credit card bill first. Once your payoff your credit card bill, you can then focus on paying off the personal loan followed by the home loan.

3. Payoff the loans with high interest rates

Identify the loans with high interest rates and start paying them. Credit card interest rates are usually very high when compared with other loans. In a long run, clearing your credit card bill of Rs. 1 lakh with a 24% interest rate will help you save more than paying off a personal loan of Rs. 1 lakh at 13% interest rate per annum.

4. Create a plan and follow it

Create a debt payoff plan with different scenarios that cover your medical emergencies, contingency money, opening recurring saving deposits while you systematically pay off your debt. Once you have finalised the plan, make sure you follow it.

5. Avoid accumulating more debt

Make a vow that you will not add any fresh loans, till you come out of all your debts completely and keep your promise. Remember that you can never come out of debt if you don’t repay existing loans and keep accumulating new ones. Don’t let big discount days and easy EMI offers lure you into the debt trap again. Be determined come out and stay out of debt.