Want To Pay Off Debt Faster? – Follow These 7 Most Effective Tips!

A lot of individuals, firms, and business owners get into the debt trap due to a lack of calculation and lack of financial planning in today’s era. And at some point in time, that bulk of debt seems astonishing & unbridled and arises the big question in front of the respective person how will he or she be able to cope with this enormous debt problem.

Poor debt management is concerned with the bad practices to get your debt under control through financial planning and budgeting. The main goal of debt management is to lower the current debt and move towards eliminating it completely but abandoning the fruitful ways of debt management can create whooping chances of a “Debt Trap”.

The amassed bad debts depict a clear notion that the main problem lies in the unawareness regarding some important points before making the decision to borrow funds. Many of the borrowers don’t even know how to efficiently deal with the debt they are incurring. Dealing with the debt is a prospective step but first of all, they should know how to categorize their debts into Good Debts and Bad Debts.

Debt crises are further categorized into business debt crises and household debt crises. A business debt crisis occurs when a company or a particular business struggles to repay its loans. Household debt crises are when there is a sudden loss of funds or source of income, or an increase in the expenditure and cost, which leads to bankruptcy or imperil stage of borrowing more funds to repay existing loans.

These crises can easily be tackled through some efficient debt management ways which everyone needs to track to minimize the accumulated debt amount in an effective and faster manner.

Here are 7 Impeccable Tips to Getting Rid of Your Debts:

1. List Your Debt by Interest Rate

Debt management always starts with planning and in the planning process first step is to note down in a sequence, all your varied types of debts as per the interest rate. For Example, suppose you borrowed five types of loan, a Personal Loan @ 10%, a Home Loan @ 15%, an Education Loan @ 6%, and a Car loan @ 8%, then, in that case, the home loan will be noted down as first and similarly others in ascending order as per your interest rates.

It seems very unfamiliar to you but this step actually works, It provides you a clear understanding that what should be your first choice or priority which has more risks from a future perspective. You have to first focus on high-interest yielding rate loans and they should be repaid as soon as possible and other loan amounts should be maintained through minimum payment.

2. Pay Incremental, Gain Exponential

Now as you have maintained the record and selected your priorities, you should move forward with the best repayment model – Pay Incremental, Gain Exponential. To understand this step follow the below-shown table.

Parameters	Scenario 1	Scenario 2	Scenario 3
EMI Amount	5,000	10,000	20,000
Payment increases	–	2 Times	4 Times
Principal Amount	2,05,000	2,05,000	2,05,000
Interest (@8%)	35,223	16,161	8,061
Total Amount Paid	2,40,223	2,26,161	2,20,051
Time Taken For Closure	48 Months	23 Months	11 Months

This table is suggesting you three scenarios that have their own implications, 

Firstly, suppose you have purchased a loan amount of 2,05,000 @ 8% interest rate. Now on this loan, you have to pay a monthly Rs.5000 EMI for 48 months, which will include the principal amount as well as interest.

In scenario 1, you will pay Rs.5000 as EMI per month (interest included monthly) and a total of Rs.2,40,223 in 48 months with no deductions and extra benefits.

But in scenario 2, if you are increasing your EMI amount to Rs.10000 per month from the initial stages, the time duration it will take to close will be 23 months to repay the amount and that will give you the list of benefits.

• Decrease in interest amount charged to Rs.16,161 as you are paying the full amount a few months early, thus decrease in the total amount paid to Rs.2,26,261
• Decrease in the duration – When you increase your EMI amount to 2 times, the repayment of the loan amount will be settled down in only 23 months.
• in one sense, saving your money as well as time also lowers your risk in another sense

 And Similarly in the 3^rd scenario, If you increase your EMI amount to Rs. 20000 which is 4 times, then you will receive more deduction in interest, more decrease in duration of the repayment, less amount to be paid, and it eventually lowers your risk to the next level.

It is quite obvious now by comparing the scenarios that if you increase your EMI amount then you will acquire exponential gain.

3. Sell Unnecessary Scraps and Items

If you buy things that you don’t need you will have to sell things that you “need” – Warren Buffett

In our households, almost everyone has some type of assets that are not in use and which are losing their value at a point in time. These scrap products or depreciating assets that can be recyclable and can be further sold to others then it would be better for you to sell them to arrange some funds to repay as EMI amounts. some of the scrap items include unnecessary furniture, electronic items, books, apparel, etc.

4. Temporary Downsizing

It is always good to purchase appreciating assets and in the position of debt, you should use quirks to temporarily downsize yourself.

Evaluate your gratification expenses, dining out expenses, entertainment expenses, unnecessary monthly subscription services, depreciating assets, and non-value-adding objects. These are some of the expenses which you have to put at a halt for at least some time to recover from the debt problem and naturally contribute to your EMIs.

5. Pay Loans with the Second Income

When there is more than one earner in a family then at least one earner should fully devote their whole income to repay loans and the rest can help to run livelihood. If there is only one earning member in a family then plan for any additional source of income that can help you settle down the loan amount without getting more risk or burden.

6. Have an Emergency Savings Fund

Emergency Saving Fund is a crucial need at this post-pandemic time and no one should compromise on that as we had already seen the suffering of people in the rampant situations earlier so it should be a must for everyone to have a secured reserve for emergency situations. Investing in long-term assets wisely can help you to sustain yourself in emergency situations.

7. The Habit of Budgeting is an Extra Blessing

Always have a data-driven approach to your spending. You should know how to keep your intelligence above your emotions. Maintaining a budget is the most benign choice for a better future. Those who don’t manage their money will always work for those who do.