According to the Reserve Bank of India’s June 2024 Financial Stability Report, this increase is being fueled by an increase in the number of borrowers rather than increased borrowing, highlighting how many households are struggling to balance their budgets or build up sufficient savings .
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Consumer loans now account for over 40% of household debt, reflecting the growing reliance on credit to bridge financial gaps. Whether it’s credit card bills, personal loans, or other loans, managing debt effectively has become critical to financial stability and peace of mind.
With the start of a new year offering a fresh slate, it’s the perfect time to take charge of your finances with a practical three-step plan to reduce debt and get closer to financial independence.
A practical three-step plan can help individuals regain control, reduce financial stress and accelerate their journey to a debt-free life.
Step 1: Get organized and create a repayment plan
The first step is organizing your debts and developing a clear repayment strategy. Start by listing all outstanding debts, including the loan amount, interest rate, and term of each debt. This provides a comprehensive picture of your financial situation and helps prioritize repayment efforts.
Then choose a refund method that suits your circumstances:
The snowball method: Focus on paying off the smallest debt first and making minimum payments to others. This approach offers quick wins and creates momentum and confidence to tackle larger debts. However, it can lead to higher total interest payments.
The avalanche method: Prioritize the debts with the highest interest to save on interest costs over time. While this is the most cost-effective approach, it can take longer to see progress, making it harder to stay motivated.
Step 2: Free up money for debt repayment
There is no magic pill to pay off debt; more money needs to be released. This means cutting expenses, increasing revenues, or ideally both. Start by assessing your monthly expenses to identify non-essential costs that can be reduced or eliminated, such as dining out, streaming subscriptions, or impulse purchases.
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Small adjustments, such as negotiating lower insurance premiums or mobile plans and switching to cost-effective alternatives, can also make a difference.
Adopting frugal habits, such as cooking at home, buying in bulk, or using public transportation, can significantly improve your monthly budget. On the income side, you can explore side hustle options, such as freelancing, tutoring, or selling unused items, to generate extra cash. This not only supplements your income, but it also keeps you focused on your financial goals.
By maximizing your cash flow and staying proactive, you can accelerate debt repayment and reach your financial milestones faster.
Step 3: Stay committed and avoid getting into debt again
The final step is to stay disciplined and focused on your goal of becoming debt free. Start building an emergency fund to cover unexpected expenses, which will eliminate the need to rely on credit when surprises arise. Start with small contributions and gradually grow the fund as you pay off your debts. This safety net provides financial security and peace of mind.
To avoid the temptation to rack up new debt, limit credit card use and rely on cash or a debit card for everyday purchases. Planning ahead (such as making a grocery list) can limit impulse spending and help you stay within your budget. Celebrate milestones along the way, such as paying off a debt in full or reaching a repayment goal, to stay motivated and reinforce good financial habits.
Evaluate your progress regularly and adjust as necessary. For example, if your income increases or your expenses decrease, you can channel the extra money toward debt payoff to speed up the process. Consistency and discipline are essential to staying on track and avoiding setbacks so you can achieve your debt-free goals with confidence.
Paying off debt faster requires a mix of strategic planning, financial discipline and a proactive approach to money management. By creating a clear repayment plan, reducing unnecessary expenses, increasing income, and maintaining an unwavering commitment, you can take control of your finances and achieve financial freedom sooner than expected.
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Every small step makes a difference, and consistency remains the cornerstone of a debt-free future.
Abhishek Kumar is a Sebi Registered Investment Advisor, Founder and Chief Investment Advisor at SahajMoney.
