If there is one constant in this ever-changing world of ours it is over-indulgence. Too many desires and too little self-control. So these days everyone is on a diet and everyone is in debt.
The reason for both is the same, too much of a good thing can be bad. If the cause is the same, then maybe the cure is the same?
1. Make a list: Just like you would start a diet by making a list of all that you eat, start a debt less existence by first making a list of all that you owe. Just like good foods and bad foods, debt too can be either good (home loan, education loan) or bad (credit card or personal loans). Good debt involves lower interest rates, plus you get a tax benefit, not to mention the fact that it goes for a useful purpose. Bad debts on the other hand are expensive and more easily available, tempting you to spend beyond your means.
2. Rank it: Now, in a diet you’d classify the foods to be banned into a ranking order, starting with the worst, say French Fries. Similarly, ban debts which are too expensive by ranking them in order of interest. Start with the one that’s the worst e.g. Personal Loan which is a loan that needs lesser collateral/ security thus implies higher interest rates than a secured loan. A home loan (secured) may cost you 11 per cent a year, while a credit card loan (unsecured) may cost you as much as 36 to 42 per cent a year. Rank all your debts, starting with the most expensive.
3. De-Tox : For a successful diet, you need to detoxify your system to begin a healthy life. In debt too, you will begin detoxifying by removing your bad debt to start a financially healthy life. Pay in the order of rank established above. Repay unsecured and high cost debts like credit card or personal loan outstanding first. Though, the amounts may seem small, along with interest, they can accumulate to huge debts.
4. Step it up: You can step up your freedom from fat by complementing it with exercise. Similarly you can step up your freedom from debt by pre-paying. Suppose you come into some money, would it be a good idea to invest it, or would it be better to prepay a debt with it? Compare the interest amounts, what you can earn by investing and what you need to pay on the outstanding amount. If interest earned is higher than interest payable, then invest, and vice versa. Do remember to add prepayment charges to your cost of borrowing when comparing. But if it’s a bad debt like your credit card debt, repay anyway!
5. Substitute Sugar and interest are silent killers: Substitute high cal sugar with low cal sweeteners. Similarly substitute high interest loans with low interest options and use the money to pay off high interest loans. For example, if you have a high interest credit card loan, find a credit card that charges a lower interest rate and transfer your balance to this one. This is mostly done free; if not – negotiate to have the transfer charges waived.
Alternately, explore a home loan top-up. Most banks will offer you a top-up as per your eligibility, and is lower than the high interest loans. The same holds true for your insurance policy. You need not tell the bank why you need the loan so borrowing is easy. A last resort is to replace your credit card loan with a personal loan.
But remember, both dieting and getting rid of debts is not a one-time exercise. Give in to temptation and you are back to square one.