The year and the decade are about to end. You must be either planning a grand party, vacation or working on your resolutions to ring in the New Year. The end of a year and the beginning of the New Year is also the time to self-reflect and make some smart money moves that can have a positive impact on your finances. Eliminating debt from your life is one such move that can have a long-lasting impact on your finances.
If becoming debt-free is in your agenda for the New Year, here are a few ways to follow and become debt-free.
Know How Much You Owe
The first step in handling debt is knowing what you owe. This will save you from rude shocks later and will help you plan your finances better. The figures may look scary, but awareness of your liabilities will help you prioritise your repayments, and this would be the first step towards getting out of debt.
If you have multiple debts, you can consider consolidating them into one. Debt consolidation allows you to take a single big loan to repay multiple loans. This can not only lower your EMIs on various loans but also lower the interest rate under a single new loan. So, for example, you can settle your credit card dues where the interest rate is 40% per annum using a personal loan which charges 12% per annum, or consolidate them into your home loan which charges 9%. Do check the various charges applicable on pre-closure or existing loans as well as processing fees on the new loan.
Budgeting And Cutting Down On Discretionary Expenses
Debt or no debt, you should have a spending plan in place. A good budgeting plan helps you keep track of your expenses (where your money goes) and how you can save. If you owe money, you need to cut down on your unnecessary expenses and save money to make regular and timely repayments. By sticking to a budget, you can save a good amount of money to pay off debts.
You Can Try Downsizing Your Home
If one of your debts is a home loan, you may consider moving to a smaller or affordable home. If you feel the property you have bought is expensive to manage and is burdening your pocket, you can switch to a smaller or affordable house, which may make you debt-free or lower your EMI. In case you stay in expensive rented accommodation, you can also cut down your debt by moving to a cheaper rented house. You should, however, do this without compromising on your lifestyle needs.
Don’t Invest In New Consumables And Sell Off The Unnecessary Ones
If your objective is to be debt-free, avoid taking on more debt. Definitely do not borrow to fill up your house with things you barely need – like a second TV or a new phone if the old one was working fine. These items may look attractive but will keep you in debt. Items you don’t need, sell to raise cash you can use to repay your existing loans.
Besides these steps, you can seek professional help to understand how you can manage your debts and pay them back efficiently. Do keep your family updated about your debt status so that they are on the same page with you on reducing expenses and sharing your debt burden.
You can also seek financial help from your immediate family and friends to pay off your debt. But do not compromise on your saving plan and continue it, even if it is a small amount while paying off your debt.
Once you are debt-free in the New Year, start saving and investing the surplus amount to achieve life’s significant financial goals.
The writer is CEO, BankBazaar.com, India’s leading online marketplace for loans and credit cards.