Abhi
Getting submerged in debt is one of the lowest point in one’s life. I’ve been there a couple of times due to my earlier spendthrift and luxurious lifestyle. But no more! Here are 5 strategies to reduce debt, you can use to come up with a personal Debt Reduction plan.
Strategy #1: Plan and chart out a Debt Reduction Plan
To successfully bring down or even get out of debt, you should first truly want to get out of it. Commit to it and make a promise to your future self and family to stay disciplined. Now, let’s get you started on a debt reduction plan. Put together a list of the following. This should give you a complete idea of your financial positions
- A list of all debts you currently owe. Even as small as Rs.100 you owe a friend. Put it all down. Mention the interest rate, start date when you took on the loan, how long you have left
- A list of all money that needs to be paid to you. Again, even as small as Rs.10 you need to get from a friend
- Now, prepare another list of all your monetary requirements for the next one year. List all possible expenses you foresee such as rent, EMIs, Electricity and phone bills etc.
Strategy #2: Consolidate debts and bring down interest
Now that you know where you stand, it is time to add actions to your debt reduction plan. Here are some strategies to bring down debt and consolidate
Club debts by consolidating them
Your first priority should be to get rid of loans that are costing you a bomb in interest. Eg. Credit card debts, loans from non-banks or individuals who charge a very high interest rates fall into this category. Consider the following example:
| Category | Total | Interest |
| Credit Card | 125000 | 33% |
| Loan from Friend | 100000 | 18% |
| Car loan | 350000 | 12.50% |
| Home Loan | 2750000 | 8.50% |
It is better for this person to apply for a personal loan of Rs.2,25,000 at 14% to clear off the credit card and loan from friend. Moreover the personal loan is consolidated and structured. Go for the lowest interest rate option, if it is possible for you to get a top up on your home loan at 9%, go for that. In that case, try to get Rs.5,75,000 or as much as you can and clear out the car loan too.
Friends, Family and Father-in-law
These are the three most important sources of money for us Indians. Seriously! See if you can get a loan from them at a lower interest so you can close debts that are at a higher interest. Eg: If your Father-in-law agrees to give you a Rs.1,00,000 loan at 12%, take that and close the debt you took from a friend in the previous example. By doing this, you save Rs.500 as interest, money that could be used to pay more principal and close the loan sooner.
Strategy #3: Focus, be consistent and make it fun!
Of the 5 strategies to decrease debt, this is the most important one. You should make it your life’s mission to get debt free and reach financial happiness. It is your duty to yourself and your family to get there! Focus and keep reviewing your debt reduction plan every week. You should have a burning desire to not owe money to anyone and get financially positive. If you smoke, cut down the number of cigarettes by even just one and put that 15 bucks towards your loan.
Be consistent in paying loans. Save money every day and keep reminding yourself of your goals. Gamify and make your debt reduction plan fun! I have a 12 month excel table which tells me how much I earn, how much I need to payback towards loans and how much I have left for expenses. Prepare a similar one for yourself. Be detailed and plan carefully and get yourself more motivated to bring down loans.
Visualize yourself sometime in the future when you have paid off the car loan! Now, count how many months is left for you to get there. Now put a countdown chart which you can strike of 1 month after every successful payment you make.
Strategy #4: Pick up side hustles
Leverage your talents to earn some extra money on the side. Every one has one or more talents. What is yours?
- Can you teach? Start taking tuitions, even for 2nd or 3rd standard kids.
- Do you speak English and live in a touristy town? Tour guide!
- Can you write? Pick up content writing jobs to do in the weekends.
- Can you code? Pick up freelance programming or testing jobs.
Do things that you enjoy so you don’t burn out. Keep occupied and remind yourself that the debt mountain you have in front of you is conquerable!!!
Strategy #5: De-clutter, go minimalist and Utility over Luxury
Spend half a day de-cluttering your house. Anything that you have not used in the past 6 months should be sold. Identify all that you can live without and sell them to friends, family or OLX. Collect all this money and use to clear some more principal amount from your loans.
Live a minimalist life for some time, stop being that dumb fukc who got you into debt in the first place. You don’t need a Rs.4,000 t-shirt. The purpose of a watch is to tell you the time. If you have one watch, you don’t need another. It is not worth it to buy one more just to impress people with your sense of fashion or wealth.
Few Do’s and Don’ts:
Things to do when in debt:
- Plan and be committed to getting out of debt
- Make the job of clearing your debt into a game
- Seek professional help if you feel you may not achieve it alone
- If you can’t afford any professional, reach out to Friends, Family or Father-in-law
- If you don’t want to talk with them and get help, write to me at abhi@littlesaves.com. I will be more than happy to give suggestions and help you prioritize and get your finances in order for free
- Keep calm and carry on
What you should not do when in debt:
- Don’t panic, get scared or angry with yourself. It will only stress you out
- Don’t repeat the same stupid shit you did to get into debt in the first place
- Don’t use a credit card. You cannot be trusted with one till you get finances in order
- Don’t ignore debts. Interests pile up
- Don’t invest or gamble when you already have a lot of debt beyond control
Some frequently asked questions about strategies to reduce debt
Yes, you can. Salary is only one of the inputs into paying off debts. Restructure your loans to get yourself more time to pay them. Find a higher paying job, or maybe another job on the weekends to earn extra income
Your credit rating will suffer if you do not pay your debts. This can make it difficult to take a loan in the future and also influence the rate of interest offered to you. Employers may not hire you. Plus, the interest from your loans will keep accumulating. Final and most serious will be you may face legal consequences and jail time.
Yes, you can look at options to re-structure your loans and also seek out loans that offer a lower interest rate.
Speak with a financial adviser. If you cannot afford one, there are forums and communities online on Reddit, Facebook etc where you can speak with experts for free and others who are in a situation similar or worse than yours.
