7 New Year Resolution Tips To Reduce Your Debt

January 5, 2022 Mutual Fund

New Year celebrations usher in resolutions related to our well-being, however, many of us often forget about our financial health. Last year was tough for most of us with the new variants and different waves of COVID-19, making many people create more debt than what they could easily repay. Therefore, this year, it is crucial that you take your debt seriously, not just until your other New Year resolutions last, but all year long.

Here are 7 New Year financial resolution tips that will help you reduce your debt:

1. Make a Budget:

Knowing your income, expenses, and total debt due is the first step to achieve financial freedom. Make a list of your unpaid loans and credit card dues to know your total debt. To clear off the maximum debt this year, you should make a budget based on your income and expenses. If you have variable income, it is advisable to review and adjust your budget every month, apart from the main yearly budget.

2. Cut Down the Unnecessary Expenses:

You might have heard this a hundred times before, but here we are saying it again! Know where your spendings go. If you are spending a major part of your earnings on things or luxuries that can easily be postponed, you should know that it is time you cut down on these expenses. Furthermore, it is crucial to control your credit spendings when you want to reduce your debt. Buying more on credit, creates more debt that can put you into a debt trap. Although the lifestyle changes are hard to make, trust us, they are worth making to be debt-free. If you cannot control your credit card usage, do not hesitate to get it properly closed.

3. Pay Your EMIs on Time:

To avoid late payment fees and high interest charges, you should always pay your loan EMIs and credit card dues before the due date. Not doing so not only attracts high penalty charges, but also accumulates an amount of debt that can later become challenging to repay. Therefore, to avoid building up the interest component and penalties, make sure you pay all the dues on time. The reckless use of credit cards can tempt you to pay only the ‘minimum amount due’. However, it increases the interest component and you will end up paying a lot more than what you actually spent. Moreover, you should also know that not paying the dues on time can negatively impact your credit score.

4. Say No to New Loans:

When you are under a debt burden and facing a cash crunch, taking an additional loan to meet your living requirements could be viable, but this can put you in a debt overhang situation, making it impossible to save or achieve any of your financial goals. Such situations can affect your mental health and lead to severe depression or suicidal tendencies.

5. Choose a Suitable Method for Repayment:

To clear off your debt, you should first understand the different methods to manage your debt and choose a suitable method for repayment. To manage your multiple debts better with a single EMI and a reduced rate of interest, you can consider debt consolidation. With a debt consolidation loan, the lender combines all your existing loans and offers the best possible interest rate on them. Debt consolidation is ideal for those struggling to pay multiple loans of small amounts with high-interest rates. You can avail of an unsecured loan like ‘Personal Loan for Debt Consolidation’ or a secured loan like ‘Loan Against Property for Debt Consolidation’, etc. It also offers a longer loan tenure to reduce the monthly EMI expense. However, to save on the interest amount, it is advisable to repay the debt consolidation loan as early as possible.

The rate of interest of a ‘personal loan for debt consolidation’ is much higher than the secured loans. You should consider this option only if you are on a verge of falling into a debt trap and need to manage your dues better. Otherwise, if you do debt consolidation for small-amount loans that are not offering much cost-benefit, then you might end up paying more than what you were paying earlier.

If you have different types of small to large amount loans and do not find the debt consolidation suitable, you should use the debt snowball method for repayment. In this method, you are supposed to pay only the fixed EMI on every loan and pay off as much as you can on the smallest amount of loan. This helps you clear off your smallest loan at the earliest. Once the smallest loan is cleared off, you can move to the next smallest loan and continue with the strategy until you clear them all.

6. Increase Your Earnings:

Increasing your net earnings might not be possible for everyone, but you can start a side hustle, monetise your hobbies, rent out a property, negotiate for a salary increment, etc. If your spouse is a homemaker, you both can discuss the possible income opportunities to share some load. The extra income you earn can be used to repay your loan earlier or you can save that amount to foreclose any loan in the future. The increased earnings will help you reduce the debt to income ratio. Furthermore, if you have any dead investment that is not generating substantial returns, you should consider selling them to pay off your debts.

7. Take Professional Help:

If the debt is huge and nothing seems to be working, it is advisable to seek assistance from financial guardians or consultants who will guide you to come out of the debt trap as soon as possible. If you cannot afford a financial consultant, take the help of the experts from the bank/ NBFC immediately.

To Conclude:

When you follow the New Year resolution tips discussed in the article, you will be able to reduce the debt burden this year. Moreover, consider negotiating on the current interest rate with your lender/s. If you are a longstanding customer of the lender with good credit history, they will consider your request. Since the chances of making any changes in the terms of new loans are less, it is advisable to take the necessary steps to lower the burden of your old loans, which will ultimately lower your total debt burden. Improving your financial knowledge and controlling your temptations to splurge on credit will help you avoid falling into a debt trap. If you want to experience luxuries and own expensive things, start saving for them. Utilise your savings to finance your financial goals, instead of splurging for instant gratification. Personal Loans and credit cards are supposed to be used only for emergencies. If you are getting better deals on shopping through a credit card, make repayment instantly. It is not advisable to use credit apps for day to day needs as such apps can be addictive, and you will create an enormous debt out of the small purchases in no time. Remember that controlling and avoiding the use of credit facilities is the basis of financial discipline.

This article first appeared on PersonalFN here