This is the best time to reduce debt, here’s how

Written by Lisa Pallavi Barbora

Lisa Pallavi Barbora is a Senior Consultant for Content at WFAN. Lisa is also a founder of In her earlier avatar, she was a National Writer and Consultant for HT Mint - a premier business journal in India.

June 24, 2020

The concept of financial net worth is not intuitively understood by individuals and yet its important for you to have a sense of your individual financial net worth. If your financial strings are strongly attached to your family, then try to figure out your family’s financial net worth.

It’s a simple concept; you add up the value of all your assets like cash, property, financial investments and from that take away the value of your borrowings like loans, credit card outstanding and lay buys and so on.

Particularly for Indian families and individuals, this is an important perspective for your financial state because many families live in homes purchased with a high proportion of loan. Often 80%-90% of the value of the house at the time of purchase is through a loan. On top of that, there are car loans, credit card payments and even personal loans put into the borrowing kitty. While the investment side of your balance sheet might be looking healthy, when you net it out against all the loans, you may realise that your net worth is not looking good. In many cases, it can be negative too.

In COVID19 times when cashflow itself has become uncertain, fixing your net worth to a positive figure gains utmost importance. This requires a focused approach towards reducing debt. If you too are facing a tough financial future along with a negative net-worth, by taking some harsh but effective steps, you can attempt to make your net worth positive. To begin with, here are two things you can do right away.

1. Draw up a plan

Like for most things in life, writing down what your debt reduction objective is will help you to get there. This is not a random vision statement of where you want your debt levels to be, rather its an outline of how you will get there. The first thing you have to write down is the amount of debt you have collectively, how much you want to reduce it to and the time frame you would like to do this in.

Next, write down the cost of each loan, which means the annual interest you pay for each type of borrowing or overdraft facility that you have utilised. Ideally, you should prioritise reducing the highest cost loan first. For example, do you know that if you are overdrawing on your credit card and not repaying then the interest cost can be as high as 36% per annum! This compares with 8%-9% per annum on your home loan. While the amount outstanding on your card is likely to be much lower, it is very expensive to keep that loan and perhaps easier to pay it off first.

After that focus on cutting back spending and improving your monthly saving amount. This amount should immediately be put to work. Start repaying your identifiable expensive loans first. However, also use some of the savings to invest wisely for the future. This investment amount can help you slowly grow the asset side of your balance. By the time you are done with repaying debt, your net worth can potentially look even healthier with the right investments in place.

If you are in dire straits in context to cashflows, then and only then, repay smaller amounts, to begin with. For example, on your credit card outstanding repay only the minimum due. Remember, this is a strategy only for those who are cash strapped. If you have managed to get the money, then pay off these overdrafts immediately.

Renegotiate the terms of your housing loan in a manner that your monthly commitment is the lowest possible. Don’t take a pause as interest expense can pile up to hit you later.

By drawing out a plan you can focus on loan repayment in a systematic manner, while simultaneously saving more and investing wisely.

2. Remove access to debt

The other thing you want to do is completely restrict your access to easy debt. If you have several credit cards which you like to juggle, get rid of all. Credit cards are useful for people who are conscious of their spends and don’t get carried away by the lure of cashless shopping. If you don’t have that control, then better to stay away. Just get rid of them. Keep your bills handy for repayment, but remove your cards from your wallet and cut them up.

Secondly, remove all shopping apps from your phone. The lure to buy stuff you don’t need is so high, but the easy access to shopping is what makes it simple to go on purchasing without thinking.

If you have loan apps which give you small size loans in an instant, then remove those too. As you may understand even a ₹500-₹3000 loan with high interest can add to your woes if left unpaid or if you have taken too many of those which collectively amount to a lot.

Expenses which require you to borrow should not happen. Get an insurance cover for your health, so that in the eventuality that you have to be hospitalised, you don’t need to borrow to pay the bills.

Remove all access to debt physically from your side and even from your mind.

Doing just these two things, planning your repayment schedule and removing access to debt can make a huge difference to your financial net worth. It will help you get back to that positive balance sheet. This will not only make your financial future secure, but rather it will also help you gain back the self-confidence and become anxiety-free about your financial health.


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