These days with the rising penetration of internet, and mobile phone, the credit system is also getting a boost with the help of apps that are being rolled out by different non-banking financial corporations or banking corporations. Schemes such as no-cost EMI, easy EMI, personal loan, no guarantor required, and the likes are resulting in changing buying behavior of consumers. The flexibility provided has often led to impulsive buying, which often results in people’s inability to getting out of the debt trap. In this blog, we seek to discuss, the ways that you can come out of your debt maze.
Getting out of a debt trap can often be a herculean task. Whenever a person defaults, he/she is likely to enter into a vicious cycle, and upon default, the availability of cheaper loans subsequently gets difficult.
Get rid of high-cost loans
One of the first things you should do is to get rid of high-cost loans. This will help in saving the high interest you would keep paying. Thus, you must take a step back and assess your loans that are outstanding by considering the rate of interest. The loans that are at a very high-interest rate should be repaid first so that you save on your interest cost by repaying earlier. Example – credit card is one such loan. The interest cost, in this case, is 3-4% per month.
Consolidating existing loans into a new one
You should consider consolidating all loans into one. For getting the new consolidated loan at a lower rate, you may also consider leveraging your physical assets or financial assets such as shares, mutual funds, and the likes. Consolidating all high-cost and other loans into one at a lower rate will help you save money that will result in creating buffer gradually. You may also try to connect with family or close friends and try getting interest-free loans that will help you save on the interest cost.
Review the composition of a short-term and long-term loan
Short-term loans are generally costlier when compared to long-term loans. Thus, you may consider taking a long-term loan if you have any property. If you are looking for a personal loan for interiors of the house or similar purpose, it is better to opt for a top-up on existing housing loan rather than a personal loan due to the cost.
The steps mentioned above will ease your burden for a short-term period. But if you are looking for a long-term solution, you need to work on reducing your expenses.
Adjust lifestyle as per means
Adjusting lifestyle as per your cash flows is the only durable and long-term solution that works wonders. While it may be painful, but it is essential to ensure you are debt-free at some point in time. You may start by identifying expenses that can be reduced relatively and easily.
Work for increasing family income
You will always have some members of the family who do not contribute to the family income. Thus, you must plan for these members. Either motivate them to get a job as per their skillset or try having investments made in their name or your name so that you can generate income.
Analyze your investments
You may be investing some portion of your cash flow for your grey years. Assess how much returns you are fetching on different investments and try to compare with the inflation of the economy, and rising expenses of your family. You should be in a situation where your money invested multiplies in the sense that it takes care of inflation of the economy and also the rising requirement of your family.
At this juncture, let us introduce you to the investment instrument that has been doing wonders in beating inflation – mutual funds.
You should consider including mutual funds in your portfolio so that with equity participation, you comfortably beat inflation and have long-term planning intact.
Ace investor Warren Buffet said
Your money should work even when you are asleep, and only then you will be able to be successful.
To implement this, the only solution is taking part in equities either directly or through mutual funds. You should opt for mutual funds as a beginner as it provides you with the following –
- Professional management
- Diversification benefit
- Flexible and Liquid
- Regulator monitored
Types of mutual fund
There are different types of mutual fund that may help you amplify your income. The fund differs based on the asset class and is classified as – equity fund, debt fund, and hybrid fund.
There are multiple funds within each category, and each of the funds has a different risk-return profile. You should try to match your interest outflow on debt availed to returns generated every month on different investment instrument. Alternatively, you may match the interest outgo and returns inflow based on various financial objective such as (in 3 years when you buy a car, five years when you buy a house) and the likes. It is advisable to start a SIP (Systematic Investment Plan) whenever you avail new debt to purchase an asset. This helps you accumulate returns over the long-term that can complement your interest on the loan.
To conclude, we can say it’s all about rational planning that can help you achieved you your dreams and also take care of debt. Adopt mutual funds today, start your journey with Tarrakki and embark on the path of Tarrakki (read financial freedom). For your credit analysis or portfolio creation for getting out the maze of debt, feel free to drop in a line to us at firstname.lastname@example.org, and we shall be glad to set-up a personalized session with you to understand your requirement.