New year resolutions to reduce your debt

Anil Rego
January 17, 2013

New Year resolutions are typically along the lines of “lose/ gain weight”, “workout more”, “learn a new hobby”, etc. but for many people it will also be to “reduce personal debt”. This is not as hard as it might seem, but like most resolutions it needs strong willpower to achieve.

By resolving to follow a few simple steps you could keep your debt levels in check this year. We give below some of the resolutions which will help you to reduce debt.

•    Examining current debt

The key step towards debt reduction is to examine your current debt to find out interest rates, repayment and prepayment terms. More often than not, one is likely to be paying higher interest than current rates and a quick visit to the bank might help reduce the interest costs. It might also be possible to convert the loan to a fixed/ floating rate loan depending on the type of debt and the bank. It is advisable to fully pay off the higher cost loans first, with the lower cost debt being regularly serviced.


•    Paying off old debt

When one pays only the minimum due on a loan/ credit card bill, it takes a very long time to fully repay the loan - especially with high interest rates taking a chunk out of the repayments. It is advisable to pay more than the minimum amount, even if one is able to pay only a few thousand rupees over the EMI, it will still help in paying off the loan faster.


•    Analyzing spending patterns

One should analyze spending patterns to observe how much is essential spends, and how much is luxury spends. When there is a significant amount of personal debt, it is best to put off luxury purchases for later and stick to the essential expenses. This will leave more money at the end of the month to pare your debt. Also, see if there are ways to reduce essential expenses, such as taking the office bus instead of driving to work, or buying a cheaper brand of coffee.


•    Keeping a strict budget

It is advisable to create a budget, which takes into account current expenses, and helps one keep aside money to repay debt. This budget needs to be realistic and take into account one’s lifestyle and spending patterns. Following a strict budget will assist in sticking to one’s financial goals.


•    Tapping short term savings

In the event that the debt is substantial and one is not sure of repaying it in the foreseeable future, one can tap into any short term savings (e.g. fixed deposits, FMPs, MIPs, etc.). However, this should be done judiciously as it is not advisable to use up all of one’s savings to repay debt and have nothing available for a rainy day.


•    Credit card woes

Most people have multiple credit cards, leading to high interest costs and other charges. The best solution is to reduce the number of cards, to one or maybe two cards, and to be used only in emergency situations. It is better to use a debit card for all shopping, as it will let you spend only within one’s means and not overspend (as is the case often, when using a credit card).


•    Sources of additional income

One’s monthly income is typically fixed, but it is possible to earn an extra buck or two in many ways. One can freelance in the evenings/ weekends with a specific skill set, or take classes for students in your area of expertise. One can also sell unused things, such as the old laptop, guitar, or cricket set - with the advent of online auction sites, it is easy to dispose off unwanted items and make some money in the bargain.


•    Set up investment plans

It is also important to start to save simultaneously, and the best way to do this is to automatically transfer funds from the salary account into some form of investment - be it a recurring deposit, mutual fund SIP, or fixed deposit. This will leave less temptation to spend, and will also help one build a nest egg for future contingencies.

Summary:

•    Reducing debt is not difficult if one follows a few simple steps
•    Analyze existing debt and see if it is possible to reduce the interest costs/ repayment terms
•    Cut down on unnecessary expenses and pare the necessary ones
•    Reduce the number of credit cards and try and use a debit card for shopping
•    Pay off high cost debt first
•    Ensure some money is saved each month