Why Millennials Should Handle Debt Sensibly?

September 2, 2021 Mutual Fund

I met my cousins on the occasion of Janmashtami, and we were discussing about how the pandemic taught us to control our finances prudently. Many young professionals faced salary cuts, layoffs and for some there was an impact on their household income as well.

Rishi, who works at a bank in the loan department said, “Amid pandemic millennials’ demand for loans has grown considerably. Most of the loans taken by this segment were for the reasons related to paying their rent or other EMIs, covering the shortfall in their salaries and meeting medical emergencies.”

To which my sister Shivani replied, “Yes, my friend also recently took a loan for covering the shortfall in her salary and pay the student loan EMIs.”

I replied, “Well, if you pay off existing debt with another borrowing it will ultimately create a debt burden and you will be living paycheque to paycheque which is financially unhealthy. You must plan to manage your finances effectively as it can help you ride through your debts.”

”There is nothing wrong in taking a loan or having a debt, but only if you are comfortable within your means to repay it. However, if you are struggling to make debt repayments or your debt repayments are higher than your net monthly income, it’s a sure sign that you are challenged with a debt burden.”

My cousin Rohit asked me, “Mitali, I do not have any kind of student loan or EMIs to be paid currently. I was planning to upgrade my iPhone as it is in trend and almost everyone in my friend circle has it. I can easily purchase it by swiping my credit card and pay later in EMIs. I hope this will not create any debt burden?”

To which I responded, “It may not create a debt burden for you. However, it will create an unnecessary debt, credit cards charge higher interest rates and you end up paying more than required.”

Rohit replied, “That means I should not buy a new iPhone?” But I can manage the debt… and the credit card can easily make the purchase possible for me, instead of waiting till I save for it.”

I explained him, “Rohit, you are trying to fulfil your instant gratification and not thinking how it may affect your financial health in future. You need to understand the concept of delayed gratification to have financially secured future. Of course, you can buy a new iPhone but, you may need to spend a huge amount of Rs 1 lac from your credit card? Don’t you think it is essential during uncertain times, to have a credit card as last resort for any emergencies?”

Consequently, millennials tend to fall into debt traps due to their urge to live a life beyond its means and surrounded by peer pressure. This often leads millennials to go out of their comfort zone to spend money. Huge credit card bills, frequent interest-ridden debts, high EMIs and low or no cash deposits, lack of investment or savings have put millennials in distress.

Listening to all this Sakshi asked, “Mitali, what will you suggest? How shall we manage our financial requirements and debts? To maintain our financial well-being and not create a debt burden.”

I explained further, the solution to this is effective financial planning to start your debt-free journey. You may not come up with a plan to become debt free in one day. The reality is that becoming debt free is a journey that requires meticulous efforts from your side. You may not be able to pay off all your past borrowings immediately, but at least figure out a plan to get there as soon as possible.

In order to manage your debts prudently, try to understand if you can consolidate student loans and lower the interest rate, or what changes could you make to lower your credit card debt? This will allow you to plan accordingly.

Millennials should be more cautious and concerned about their financial well-being and aim to have a financially secured future to survive any unprecedented events. Here are few points to be noted to manage your debt effectively:

1. Reduce your credit card swipes

Many salaried millennials are easy targets for credit card lending institutions, as they provide several attractive offers which millennials find interesting. The offers such as discount at restaurants, cashback on purchase of certain products via credit cards, discounts on movie tickets or OTT platform subscriptions, etc. All these gain traction from millennials and they fall into the debt trap without understanding the higher interest rates applicable on usage of credit cards.

However, frequent usage of credit cards can have a negative impact on your long-term financial goals. It is hard to resist the usage when it comes to having no cash with you. It is very convenient to pay. Unfortunately, most individuals don’t realize that the amount needs to be paid off after 45 days, failing which exorbitant interest rates are levied.

Hence, step one is always stop frequent spending through credit cards on non-essential commodities. Having a credit card is not a bad thing but understand its features and consider it as a last resort in times of needs.

2. Budget your expenses

One way to tackle debt is to learn how to live within your means. You must practise budgeting exercise to understand the pattern of your cash flows. It allows you to cut down on unnecessary purchases and it not only helps to save some extra buck but also instils a healthy financial habit.

Don’t worry, you need not have to deprive yourself of entertainment or end up starving. Millennials like to maintain a certain lifestyle and sometimes to live up to it they may tend to spend extra which is not required. These are one of those expenses which are little too lavish and that could be reduced or cut down. For example, you may not have enough money for the year-end trip you planned, if you impulsively spent on unnecessary things through the year.

Thus, budgeting can help you plan your spending and save a certain amount. These savings can help you reduce your debt burden; in addition to that, you may reduce your debt by avoiding unnecessary spending.

3. Pay off heavy debts

To begin your debt free journey, you must consider reducing your heavy debts at first. These includes huge credit cards outstanding and personal loans on high interest. Such debts consume a lot from your income and you live paycheque to paycheque without saving any amount.

You must consider clearing out heavy duty debts as early as possible on priority. In order to manage your debts appropriately, list down all the loans you have and target to clear the heavy interest ridden debts soon.

To keep yourself out of debt, remember to pay off your debts first when you receive your monthly income and then consider spending the rest amount. Unless you clear your major debts, you may not be able to save any amount for investment purpose.

4. Avoid instant borrowings

Millennials succumb to convenience of taking instant app-based loans on high interest for minor requirements and, eventually, fall into a debt trap. Such loans may look attractive and serve your purpose for instant gratification, however it will affect your financial well-being and create unnecessary debts.

You should maintain your debt-to-income ratio to not more than 40%. Debt-to-income ratio is one of the vital financial health indicators and the lower it gets the better it is for you. This will give you a better perspective on managing your debt to avoid any credit score complications. A high Debt-to-Income ratio will have a negative impact on your credit score.

5. Start Investing

On other hand, there are some millennials who are saving a certain amount and they apportioned an amount for investment as well. In fact, there might be some peers around you who earn less than you but are able to save more. What is stopping you from savings and investments is your debt burden.

You should manage your debts prudently and figure out what it takes, maybe you need to upgrade your iPhone or other gadgets less often? Look through your bank statements for spending and your credit cards bills. You can’t keep running a personal finance deficit every month and delay your wealth creation journey.

In addition, lack of financial knowledge may also delay your investments, so you must be equipped with financial literacy to have a better control over your finances and manage your debt efficiently.

Being debt-free may seem to be a daunting task, but it is not impossible. With successful planning, you can easily reduce your debts and have a debt-free financially secured future.

This article first appeared on PersonalFN here