How to reduce your debt?

Highlights 

• Student loan, house loan, car loan, credit card dues and other such debts can instil the fear and anxiety, if not responsibly managed in time.
• Financial awareness and debt reduction can boost confidence and build self-reliance in people.
• Debt-to-income (DTI) ratio can give individuals an idea about where they stand. Generally, DTI at 35 per cent or below is considered healthy.

For many people, managing finances and eliminating debt burden can be an overwhelming task. If not managed responsibly and in time, student loan, house loan, car loan, credit card dues and other such debts can instil fear and anxiety in one’s mind.

Hence, financial awareness and proper means of debt reduction are essential tools to have as these not only help you maintain a healthy financial track record but also prepare you for a hassle-free retirement life.

So, here are nine points to keep in mind to initiate your journey into a debt-free life.

Also read: Mistakes People Make Paying Off Debt That Cost Them More

1.    Know all of your debts

All kind of debts are different, and so, each influences your finances differently.

It is important to note the cost of all debts, which can be an ideal starting point to begin your debt reduction journey.

Debt amount, frequency of payment, interest costs, etc are some important points that should be taken in account while calculating debt costs.

2.    Avoid credit card usage when possible

While figuring out ways to reduce or clear debts, people should also mind to not add any extra amount to the existing dues. As credit card bills are also technically debt, using one should be avoided unless it is an emergency.

3.    Debt-to-income ratio

Debt-to-income (DTI) ratio can give individuals an idea about where they stand in terms of their income in regard to their debt.

To calculate DTI, one should sum up their annual debts or multiple the monthly debt payments by 12 and divide the total by their annual gross income (before taxation), which will give you a per cent result.

Generally, DTI at 35 per cent or below is considered healthy. People with a DTI of more than 35 per cent are usually advised to work on debt payments and bring the ratio down within the safe territory.

4.    Reduce interest rates

Talking to your lender to reduce the interest rates is worth a shot. No one knows if a lender may find your bargain on interest rates reasonable and agree to reduce it, which will be a little relief.

5.    Manage your expenses and finances

Managing regular expenses and finances along with debt payments can be a challenging task. But as it can be a helpful technique, one should differentiate between their needs and wants to minimize the extra expenses.

Food, transport, electricity, phone bills, etc are the basic needs. However, shopping during winter sales does not always qualify as a need of the hour when paying off debts.

6.    Watch out for passive income

While figuring out your debt reduction strategy, passive incomes like monthly or quarterly dividend can be an added inflow of money.

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7.    Target your debt-free days

Looking forward and planning for your debt-free days can be an effective way to keep yourself motivated. So, marking a tentative day two months or two years from the present time on your calendar can actually be a source of inspiration to work off your debt.

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8.    Reward yourself for timely debt payments

Whenever possible, celebrate your little victories every time you achieve a milestone in your debt reduction and elimination journey.

Like a cheat day during dieting, rewarding yourself in inexpensive ways can keep you motivated to continue the race to debt reduction.

9.    Work towards increasing your income

One can also work on paying off some extra debt from time to time by initiating a pay raise at your current job or setting up a passive source of income.

Increase in basic income means that you will have more money in your hand, which can help you in paying off your debt more quickly, give you enough cash to spend on regular needs or simply enhance your savings.

How to reduce your debt?

Bottom line

The journey of debt reduction is challenging. At times, you might be compelled to indulge in certain non-essential expenses that will take money off of your debt payments. It is generally advised to refrain from such cravings, as it will help you in controlling your finances and clearing off your debt sooner.