- Date : 21/11/2018
- Read: 6 mins
Here’s how you can organise your debts and build your savings while paying down debt
First, the good news: contrary to popular belief and Hollywood representations in movies such as Confessions of a Shopaholic, women are less tempted than men to buy expensive items on credit – or so says a study by three Economics professors in the US.
The study, first published in The Journal of Consumer Affairs earlier this year, says gender “absolutely influenced attitudes about debt”, and that in general, “women are less tempted than men to use debt to buy luxuries”.
Interestingly, the study was picked up by more than one science group, one being Psych Central, an independent mental health social network based in Massachusetts. What this means is that even scientists believe that you, as a woman, are genetically engineered not to fall into a debt trap.
Which brings us to the bad news: despite this biological advantage, women can – and do – still find themselves deep in the red.
A report in the UK’s Guardian newspaper, albeit a while ago, quoted from figures culled by the debt management company Baines and Ernst to say that the Internet was ‘seducing’ women into debt, especially those in the 18-30 age bracket.
“Young women are particularly at risk because of the aggressive marketing of many firms on the Net, which target health, beauty and fashion products at that age group,” said the Guardian. As a result, the number of women seeking the company’s guidance on debt management had risen 209% in a year.
What if you were among them? Could you have whittled down your debt to a manageable size? Actually, you could, provided you had a debt repayment strategy in place, and followed it in a disciplined manner. So let us consider how to pay off debt.
You need to be on top of your current financial situation before you can start digging your way out of the debt hole; without control over expenses you will never manage to pay off debt. What you need is a monthly budget that you must stick to.
Needless to say, you will have to say goodbye to extravagance and live modestly for a while; you can’t afford to dig into your budget surplus. So while listing the essentials, make a clear distinction between the things you need and the things you want. Whenever you pay for something, ask yourself if you really need it. Buy only what you need.
If possible, try and think about additional sources of income; every rupee counts when it comes to fighting debt.
First and foremost, you have to prioritise your debts. It is never advisable to attempt debt repayment in a haphazard manner, so decide which debt(s) you will clear first.
If you start off with the small ones first, you will start freeing up disposable income gradually. As you free up more and more cash, you enable yourself to tackle the next debt with a slightly more amount. This debt repayment plan is called the ‘debt snowball’ method.
Remember, not all debt is bad; a home loan is a debt but it is a good debt; it ensures a roof over your head and is a tax-saving tool as well. But consumer debts can ruin your financial freedom, so it is these you must target first.
Also, it is likely that you have a series of petty loans that together works out to a big amount but is easy to tackle individually. Pay off the small individual debts; it will bring satisfaction and motivate you to move on to the next. This is the essence of the debt snowball method.
Some people advocate paying off debts with the highest interest rates first, as this leads to quicker debt repayment, but the problem with this method is that it puts a bigger squeeze on the debtor’s resources.
Once you have worked out the total amount you owe people – and the specific amounts for each – it is time to figure out how much money you can squeeze from your budget list.
You may have to cut down in several areas; it is not hard really, there is seldom need to change your lifestyle drastically. However, it involves cutting down on consumer debt (credit card bills) totally. This not only frees up cash, but also reins in spiralling debt.
Moreover, the freed-up cash will serve two purposes: (a) it will add to your debt repayment kitty, and (b) it will help you move on to bigger debts.
Another aspect of the debt snowball method is paying only the minimum amount required on all of your debt, save the one debt you are in the process of paying off, which should be the debt with the lowest amount owed at that point in time.
This way, you avoid being penalised for not paying the minimum amount due, but at the same time, you also make steady progress in one debt payment.
Once you have paid off one debt, move to the next smallest debt, applying the ‘minimum amount’ formula here as well. This means that the minimum amount from the first debt, the minimum from the second, and the freed-up cash will be spent on the second debt.
Similarly, you move on to the third debt, the fourth, and so on, continuing with the cycle till you are debt-free. The best part about this debt repayment plan? As you begin to pay off debts with higher balances, you will have progressively larger amounts of money for repayment purposes!
Once in a while, you will come across unexpected money outside of your salary – maybe from a raise, people repaying you what they borrowed, annual bonus, an IT refund etc. Make a payment to the lowest debt you are paying off.
To sum up, elimination of bad debt typically involves three stages: organising, prioritising, and eliminating. Once you are debt-free, you will be free of the stress that bad debt brings and you gain peace of mind. It will also free up money that you can invest to make more money.
When you are trying to work out how to repay your debt, also make the following mantra part of your plan: “If I don’t have the money, I can’t buy.” It really is as simple as that!