How to plan your financial future when you’re in debt

Introduction

Planning your financial future can be stressful and never ending if you have some form of accumulated liabilities from the past. However, with minimal prudence and sticking to some basic strategies, one can effectively ensure that they can keep their loved ones and themselves secure.

Even if you have a set repayment plan in place, it would be wise to take measures to mitigate the unwarranted risks and maintain a small corpus of emergency funds in case things go south.

What are debt reduction techniques?

Debt reduction techniques are effective measures one must take to repay their liabilities and free themselves from the debt stress as soon as possible. The good part about these techniques is that they would be applicable irrespective of the amount of liabilities you owe.

Alongside deploying debt reduction strategies, it is also important to jot down your financial goals and clearly chart your path to them. This would also help you be cognizant of your long term strategy to meet these goals.

How to plan your financial future with debt?

Following are some debt reduction techniques which are sure to help you manage your debt effectively and simultaneously help you plan for ahead:

1. Prioritise your liabilities

The first step to reducing debt may actually sound like a no-brainer, but it is essentially important to list out all debt you owe and sort them on the basis of their priority.

Ideally loans which charge a higher interest rate or are old should be cleared off first.

2. Analyse, restructure and consolidate your debt

Even though the idea of taking a loan to pay off a loan sounds wrong, it can often be a wise choice in cases where there might be a difference in the rate of interest being charged by the lenders. Banking institutions today offer loans to consolidate your debt at an interest rate ranging between 7-12% and other non-banking finance institutions allow you to avail loans to consolidate your debts at an interest rate of 11-14%. Many banking institutions also offer innovative repayment strategies. You would have to search for a loan which fits your repayment strategy and tenure so that you can consolidate your debt accordingly.

3. Make sure that you have adequate insurance coverage

When you are already under debt stress of some sort, there is a certain comfort in knowing that your loved ones would not be liable to fulfill your debt liabilities in case of an untoward incident of any kind. To ensure that you have adequate insurance coverage, you need to make sure that the sum assured of your policy exceeds the total outstanding liabilities owed by you to the bank. Similarly, one must also have basic health insurance so that they are not burdened by unforeseen sky-high medical expenses in case they fall sick.

By taking adequate insurance, you are in a way mitigating the risk of external factors affecting your financial goals. This step is extremely important if you’re the sole breadwinner of your family. It must also be known that you are liable to receive tax incentives on purchase of insurances and hence, they are less likely to pinch your pocket.

4. Try shifting to a Flexi repayment plan

Various banking institutions today allow borrowers to change their traditional personal loans into flexible loans at the same interest rate. The flexible repayment plan allows you to lower your EMI’s by upto 45% as you only pay interest on the amount you use from the sanctioned amount. You can also pay higher installments when you have a surplus cash reserve and also pay only the interest amount as an installment when funds are running low. This loan plan is ideal as it helps manage debt in an easier and customised manner.

5. Exercise your surplus money judiciously

When managing debt, it is crucial to determine how surplus money is used or invested as it has a direct implication on paying off your debt. There are various means to utilise the surplus funds to effectively manage your debt. For starters, you could use the money to create a small emergency fund to rely on for a rainy day. You could invest the funds with a low risk appetite in highly liquid wealth generation instruments so that the funds remain accessible. By doing this, you are not only protecting yourself from generating more debt in the future, but also generating some minimal returns on your funds while doing it.

6. Remain cognizant of your finances

A lot of people are often in the dark about their income and expenses. It is extremely crucial to put in some minimum effort each day to be more cognizant of your personal finances. In the end there is no shortcut to debt reduction without effective budgeting. You should try to generate income from multiple passive sources and create realistic budgetary constraints to manage your debt effectively.

7. List out long-term and short term goals

Last but not the least, it is also extremely important that the stress of managing your debt shouldn’t leave you foresighted. Your short term goals and long term goals would help you put your financial condition in perspective and aid you in taking financially sound decisions. You should also interact with financial planners and consult them to chart out a definitive strategy to achieve these goals.

Conclusion

The bottom line of planning your financial future with debt is that with some meticulous scrutiny, one should effectively be able to overcome their liabilities and also save enough to lead a long comfortable and tension free life. You should incorporate definitive debt reduction strategies highlighted above. If you feel that you are having a hard time managing your debt, it is recommended that you visit a credit counsellor who would guide you best and help you develop a plan to reduce your net liabilities.