FINANCIAL FREEDOM. MOST OF US DREAM OF THE DAY THAT WE DON’T OWE ANYTHING TO ANYONE!
But lots of people reach a point in life when they make the choice of going into debt. Most of us don’t have much of a choice as we often just don’t have enough money to buy a house or pay for a university degree in cash. Taking on debt can be a tough decision. Ultimately, the best financial position to be in is to have little or no debt. But there are a few tips you can take into account to make sure your debt works better for you, depending on where you are in the debt spectrum.
DECIDING ON DEBT
If you are one of the lucky few without any debt, you’re sitting pretty! Think carefully about your financial situation before taking out a loan or buying on credit. First things first, get your personal finances in order. Draw up a monthly budget, and plan your spending carefully. If you can, build up an emergency fund, and save money for your big purchases. Don’t forget to take into account any deductions from your salary, such as tax and medical aid.
It’s also important to understand the difference between good debt and bad debt. Borrowing money to increase your income earning potential in the future – for example, through purchasing a property or investing in your education – is considered “good debt”. Shopping ‘til you drop with your credit card or retail account, which won’t help increase your future income, is considered bad debt. Always choose good debt over bad debt if you can. When you think you are ready to go into debt, calculate how much you can afford to pay every month and be sure to shop around for the best interest rates. Make sure you understand any commitments that might be included in contracts, like the requirement of having motor insurance when you take out vehicle finance and life cover on a home loan.
MANAGING YOUR DEBT
Chances are that, like most people, you might have some debt already. When you start earning a salary, the offers for credit cards, retail accounts, vehicle finance, and personal loans come rolling in! It’s pretty easy to start over-spending. Already in the red? Have a close look at your spending and figure out where your money is going every month. Revisit your budget, and stick to planned spending.
Then, try to pay off your debt as quickly as you can. Sometimes picking the smallest amount that you owe and paying it off quickly – say a personal loan or retail account – can help you feel like you have control over your finances again. You might also want to seek professional advice from a qualified advisor who can help you get your finances back on track.
WHAT HAPPENS WHEN DEBT TAKES OVER
If you find yourself in too much debt, you’re not alone. Millions of Indians are over-indebted and are at least a few months behind on their payments. It can also be very hard to talk about money matters, especially when you feel like things are spinning out of control. If you find yourself in a situation where you can’t keep up with your repayments, the best thing is to get professional help ASAP.
Tightening your belt until your debt is paid off might seem extreme, but it’s the best approach for getting your personal finances back on track.
BUILDING A GOOD CREDIT RECORD
No matter where you are in the debt spectrum, it’s important to always try to maintain a good credit history. You may never have seen it before, but your credit report is compiled by credit bureaus from the first time that you borrow money – including loans, credit cards, and retail accounts. This is one of the main factors that lending institutions takes into account when deciding to give you a loan or credit card, how much you qualify for, and the interest rates you will have to pay.
Remember that jersey you bought on account when you finished school? You might have forgotten about it but the credit bureaus have not! If you never paid your account, it could have negatively affected your credit report – and might stand in the way of your dreams! Sometimes building up a good credit history can be challenging when you are just starting out and don’t have any accounts in your own name. You might know that you want to buy a property in the future, but have no idea how to create a good credit report so that you qualify for a loan when you need one, a few years down the line.
Although usually considered bad debt, one option is to open a retail account – remember that your goal is to build up your credit score, not your wardrobe! Find a retailer with low monthly interest rates, and most importantly, check whether there is an interest-free repayment period. Make small purchases that you can afford to repay quickly within the interest-free repayment period. Remember, even though buying on credit can be tempting, prioritize your needs over your wants and avoid spontaneous purchases. Keep checking your credit report regularly, and you will be well on your way to managing your debt!