How To Manage Your Debt

By Author: finology ventures
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“A man in debt is so far a slave” said Ralph Waldo Emerson. These are pretty strong words coming from one of the most celebrated poets of the 19th century.
But why would a poet venture into the finance space? And why would he make such a stark equivalence between debt and slavery? Let’s try to understand debt and what he is trying to say.
The definition of debt is the state of owing money.
When you borrow money, you’re borrowing from your future self. It means that in the future you will have less money to spend unless you use the loan to invest in education, a profitable business or an appreciating asset (such as a house over 25 years)
This means that not all of kinds of debt are bad.
But the title is how to manage your debt which means you have already decide to take on the debt and you are now mentally preparing yourself for process of the steady outflow of cash from your bank account for the significant future.
This is not a reason to be worried. Almost everyone runs a debt. Some run it significantly more than other.

Japan in 2021 has a Debt to GDP ratio of 2.56. That ...
... means Japan has to borrow $2 to earn $1 in revenue and yet their credit rating according to Fitch is A+ i.e 5th out of the 18 possible ratings. India on the other hand has a Debt to GDP ratio of 0.9 in 2021 much lower than Japan, yet India’s credit rating is BBB- , i.e 10/18.
Twice as worse as Japan with less than half the Debt to GDP ratio!

All the developed countries in the world are running very high debt yet their credit ratings are significantly superior to India.

So it can be seen that countries generally do not have much limits to the amount that they can borrow as a whole. That is because the sovereign states have the ability to print money and restructure debts at will but that is a conversation for another day

You and I and companies certainly do not enjoy those luxuries and thus we have to be smarter about our debt.
So the first question is
How much debt is too much?
This is what the Banks have to say. When you add up all of your monthly debt payments along taxes this number should not exceed 40% of your income.
So when you add up your monthly credit card payments, subscriptions, rentals etc the total of all of these payments should not exceed 40% of your monthly income (before taxes).
Lenders call this your Total Debt Servicing Ratio (TDSR). If your TDSR is 40% or greater, they will not lend you any more money.
Thus the first thing to keep in mind while to begin with a small proportion to begin with and keep it well below 40% to avoid getting into unnecessary complications

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Now as the credit ratings agencies have shown the real test is the ability of individuals, companies and countries to manage their debts.
The steps to effectively managing debt is:
Stop taking on more debt:
This strategy is not going to get you out of debt but it will keep you from making it harder to pay off.
And the best way to stop taking on more debt is to create a budget. A budget will bring your expenses in line with your income. This will also ensure that every rupee is accounted for and that you do not need to rely on other methods to get money.

Pay your debt on time:
Making a habit of always paying yYour debt on/ before time is invaluable. This helps build up your credit score thus enabling future benefits.
Late payments often involve a late fee and while a couple of late payments are not that big of a deal, this is not good debt management and our goal is to get good at managing debt. Keeping the debt payment on auto-debit can be a handy practice.

Build an emergency fund for backup:
This is a very important step and this ties into what we had said in step 1. Building a small emergency fund is vital to paying off your debt because if you don’t have savings, you will have to borrow to pay off your expenses.

Your eventual goal should be to have atleast 3-6 months of emergency savings. And if the pandemic has taught us anything , it is that nothing can be taken for granted and life can be tossed into a disarray at any time. So save , save and save as much as you can

Use the Debt Snowball Method:
The less you pay toward your debt balances every month, the longer it'll take to pay them off.
Interest can exponentially expand the timeline for your debt repayment, and most debt balances rack up interest charges every month.
In this method you pay as much as possible on your smallest debt to clear it off first and the minimum amount on the other debts. Once this debt has been paid off, then you can move on to the next smallest debt.
Using this method means that the burden of obligations gradually reduces over time as the sources of debt decreases and this also motivates you to keep paying the debts off one by one. Motivation is key because the interest payments get steeper as you progress on your journey to financial freedom.

Small Increases Add Up
While many feel that a few small increases won’t affect them very much, the cumulative effect can be significant enough to destroy a budget.
For eg: the fuel prices have gone up by 50 paise in Mumbai yesterday. Now 50 paise does not seem a lot of money and we may not mind that too much but here is an example.
The most popular car in India is the Swift Dzire and this has a fuel capacity of 37L. Therefore now you are paying Rs.18 extra a month for fuel and over a year this translates into Rs.220 per year.

That’s two months of Netflix Mobile gone! And this is a result of just one hike, the government has actually hiked the price 5 times in the last week so you can understand the impact that is going to have on your balance sheet.
Therefore always look out for those small pesky expenses as they can come back to haunt you.

Increasing your income:

Expenses are not the only thing that can increase over time. You can also do a world of good by increasing your income. Thus actively looking for ways to make passive income is a good way to managing debt.

You will be able to dedicate more money to paying off debt and this will reduce interest payments significantly and save you years of headache

In conclusion how you attack your debt is upto you. Hopefully this blogpost has shown you ways to do it.
While some of these steps may seem small—like avoiding new debt and building an emergency fund— they're important for building a solid financial foundation that allows you to successfully pay off your debt.
.Tracking your progress along the way helps keep you focused and reminds you that you're getting closer to your goal of paying off debt and becoming debt free