Becoming Debt-Free: One Step at a Time

In the millennial economy of buy now & pay later, to be debt-free is quite a task. While everyone likes the idea of being debt-free, most of us don't even know what it truly means. Being debt-free doesn't mean you should have absolutely zero or nil debt, it's more like maintaining a minimal amount of good debt and eliminating all the bad debts that might impact your financial well-being.

Being debt-free is considered a mark of being wealthy in countries like India. However, having good debt is also a sign of balanced financial health, but there is always a fine line. When you start considering taking debt or credit for every little thing and your definition of affordability changes, it's a sign of concern.

We all know that availing of credit is pretty convenient these days. You can get a new credit card faster than your Amazon delivery. These easy debt repayment schemes of credit cards, fast-track loans, and many other facilities have created an illusion of affordability in our minds! We think if we can pay the EMI, we can afford to buy a particular thing. That's not true. In an actual sense, affordability means having enough savings or cash in hand to purchase something.

The very first thing you should do to be debt-free is to replace the wrong definition of affordability with the actual one. This way, you can decrease the financial dependence on debt to get certain things.

Most people want to be debt-free because living under the burden of debt is stressful. People who manage their debt efficiently live life stress-free. All their money is available for savings and consumption, instead of a major part going into paying for EMIs. They invariably save more which allows them to plan for their life goals, develop a better standard of living and ultimately, get one step closer to being financially free.

People who aim to be debt-free buy differently. They don't buy just because they can afford the EMIs. They don't use credit cards to earn reward points. They prefer cash /bank balance to buy things because it's the most relevant sign of affordability. When we talk about buying new things, a trait of a debt-free person is to save & budget first, and then make any expenses.

Now, let's explore what a person can do to become debt-free.

Make a budget

Draw up a list of all the incomes & expenses you need to consider or take care of while managing debt. Start by working out fixed costs like rent, school fees, utility bills, household necessities etc. After this, list out all the variable/avoidable expenses like going out, online shopping, entertainment expenses, etc.

Also, list down all your existing debts in detail. Include things like the purpose of the loan, pending loan amount, EMI amount, due dates & interest charged. Lastly, detail all your existing investments & savings. This list will give you an overall picture of your debt situation.

Prioritize & cut back

Now that you have the list prepared, it's time to prioritize your debts and cut back on expenses. As mentioned before, not all debts are bad. Debt taken to create an asset is considered good and benefits you in the long run. Whereas, if you are piling up debt for sheer luxury or any non-beneficial purpose, then it's best to pay it off as quickly as possible.

Even the interest charged on such debts is enormous compared to standard loans. Set a priority for all your existing debts and accordingly check if your monthly cashflows are comfortable enough or not. Ideally, you should also be left with at least 10% of your income to save. If not, you need to cut back on your expenses.

Automate your payments

When managing your debt, it is always better to never miss a payment as it reflects very badly on your credit score. Try and have an auto-pay system for your liabilities, including your credit card bills and make sure that you have sufficient balance /cash stashed in your account at the start of the month for this amount at the bare minimum. Always aim to pay off your credit card balance before the due date and avoid rolling over the balance to the next billing cycle to ignore excessive interest and additional debt burden.

Plan a concrete repayment strategy, follow & repeat

The next thing you need is a solid repayment strategy to pay off debts as quickly as possible. You can use one or more repayment techniques to get out of debt. Generally, you have two options: 'Pay More Than Minimum' or 'Debt Snowball.' You can pay more than the minimum amount required each month to lower your debt if you have excess savings. If you pay more than the minimum, you will be minimizing the amount of interest charged each pay cycle. Start from the smallest amount, as it's the easiest one to repay. Make sure the lists of your debts are handy. Keep updating them as you start prepaying debts.

Another option is to use the snowball strategy which involves paying off your smaller debts first, and then moving on to larger ones. This allows you to prioritize your repayment list based on the amount owed, starting from small. This strategy will assist you in gradually eliminating your debt. You might also use the cascading method, which involves paying off the credit card bills or loans with the highest interest rate first rather than the lowest. When compared to snowballing, this is a faster and less expensive strategy.

A hands-on approach can help you successfully pay off debt if you sincerely follow the process. If you have a strong repayment history, you may also contact the issuer and ask if they can renegotiate your loan and the terms of repayment, especially if you are facing some genuine concerns. If you've been a good customer, most lenders will work with you to find a solution.

In short, it is easier to avail debt, but it is a lot tougher to make it zero. People fall into a debt spiral, looking for the easy way out, which often results in a debt trap or financial stress. It's best to avoid any debt as far as possible for lifestyle purposes at any point in life, especially so when you are young. Instead, try to save as much as you can and be flexible to take risks in life. If you are in debt in the initial years of your life, you will spend a majority of your learning and wealth creation period paying EMIs.

Even good debt, like buying a house, has to be planned properly. Consider it when you are settled in life, are sure about your career and preferably, have your spouse by your side. It should not happen that by the time you become debt-free, you realize that the majority of your work-life is already over, and in a few years, you will be retiring.

This realization at a later stage of life is painful for many people. Therefore, do your best to remain debt-free through sound financial investments, savings, and proper planning.