Our personal finance has many elements like our cash flows, investments, assets, & most important…. ‘Liabilities’!
These liabilities often come in the form of different types of loans.
You all will agree that, till a few years ago, people used to stay away from ‘Loan or liability’!
Reasons? Mainly two-
One, People were ‘content’ with what they had or they had patience to create or purchase what they wished for!
Second, getting a loan was a bit difficult due to its strict terms & conditions.
Now, the situation is different! Today loans are available easily; even without any collateral in some cases!
E.g. Vehicle loans, loans for interior decoration, gold loan, personal loan etc. Not only banks, Tours & travel companies offer to pay the future cost of your trips in EMI form.
One can walk into a gadget store, buy the one which he/she selects & purchase without paying full amount.
This easy money makes many of us fall for ‘buy now, pay later’ schemes, buying expensive items on credit cards & personal loans.
As per the ‘monthly report by The Reserve Bank of India’, for August 2023, the growth of the ‘personal loan’ segment among total deployment of gross bank credit is one of the highest! Credit cards, gold loans, and personal loans are among the highest!
Looking at this, it’s time to check how your liabilities are placed in your total portfolio. If they consume a major part, then we must act on reducing it!
What are the reasons that make our portfolio debt-heavy?
1. Often, we purchase costly things without a plan:
It’s a common practice on weekends that we visit malls or markets. We find many things attractive.
Sometimes, we check the availability, & jump on purchasing it if it comes with an offer like ‘Buy now & Pay later’.
Also, we notice lifestyles of our friends & colleagues, try to match ours with that of theirs & buy the items.
This unplanned shopping often leads to many credit card bills & buy now pay later bills.
2. We go behind ‘instant gratification’:
Increasing use of social media triggers instincts of many to buy what they wish for. Social media often shows all things good! It creates an instant urge to buy the things we wish to.
Also, we are becoming ‘impatient’ when it comes to buying things or availing services. We feel the urge to buy certain things as & when we want.
This need for ‘instant gratification’, makes us increase the loan side of our portfolio.
Why? Simply because things that we wish to buy often come with ‘heavy price tags’.
3. FOMO factor:
In society, there are some parameters set. E.g. getting a good education, getting a good salary paying job, buying a house, vehicle etc.
People consider these parameters as ‘the judging card’ for their ‘progress in life’.
This creates anxiety to buy luxury items, create assets like real estate.
Last month, once a client shared that, he regrets his decision to buy a property. Today, He can’t use it for his own residence & he can’t get enough rental income from that property either. Just because his other family members insisted, he purchased the one as they convinced him that he may lose out as his other friends have purchased their own house long before.
4. We find pleasure & happiness in materialistic & tangible things:
Many say, “Do not buy things, collect experiences”! Well, for some people it may hold true but many are behind buying things ‘that can define their standard of living’ .
In an order to upgrade our standard of living, we try to upgrade our lifestyle.
It comes with a huge cost. This in turn, asks for loan support.
5. We find the loan process easy:
Just because, loan application process is easy & it is easily available, many people buy things or avail services on loans!
Today, it happens swiftly, so we never ‘feel the burden’ of that ‘borrowed money’ while applying.
Like these, there can be different personal reasons, needs & responsibilities that can make our portfolio debt heavy!
When we finally acknowledge that our portfolio is high on debt, how can we reduce this burden?
1. No more loan applications in the list:
To pay off the existing ones, people decide to take one more loan so that they can pay off previous loans taken. Please do not do this!
Loans, when we take, come with a huge amount, but the repayment happens over a certain period. Try to increase the payouts towards closing all existing loans. Simply taking another loan to pay off previous loans is not the right way. It can lead you into debt-trap!
2. List down all the loans to pay off the suitable ones:
List down all the loans taken. List them with details like the outstanding balance, loan tenure, rate of interest, amount of EMI.
Short term loans like personal loans with a high amount of EMI can be aimed to pay off first. If not, then check loans with high EMI, with longer tenure that can be considered here to be prepaid gradually.
This will give our cash flows little breather. We will also feel better about the fact that at least a part of our loan portfolio is reduced.
Please note that which loan to pay off first is totally case sensitive.
3. Pay off loans from friends:
When we start working on the liabilities side, try to pay off loans taken from our friends or family simultaneously. These loans carry a lot of trust shown upon us & are directly related to our personal life.
Many of us take it casually when it comes to repayment of these loans & focus on paying loans from financial institutions.
Loans from family & friends may not carry a typical loan repayment cycle but it’s our duty to repay them soon as possible.
It will help to keep the trust & relations intact!
To come out of the multiple loans, budgeting can help!
We can keep the target of loan repayment period fixed & during that period, we need to make sure that we follow the budget strictly.
It will help you to curb on any unwanted expenses & will help you to spend on your needs only.
Draw a budget, follow it with discipline to see the results. The surplus that you can have, will be utilized to pay off the loans.
5. Cash Flow management:
To avoid taking a number of loans, we must look at our own cash flows. Our income & expenses are something we should clearly know about.
Sources of income are limited but ways to spend money are many.
We should keep a record of our expenses. See the increase/decrease in it regularly.
We will get an idea & confidence to set our future goals accordingly. These future goals will further lead to disciplined investment to achieve them rather than ‘achieving them with quick & easy money borrowed’.
6. Sell any extra asset created:
If we are facing heavy liabilities which we think will take longer to pay off , we should then consider selling any extra asset that we possess.
Sometimes, it can be gold or real estate bought for investment purposes. This will be a quick measure to pay off the higher loan amount.
7. Cut down on lifestyle:
Lifestyle is something to show & a class is something to create & carry along!
Lifestyle expenses consume a major part of our cash flows & they are recurring.
They are often unplanned. So, Try to cut down on these expenses. It will create a certain amount of surplus in our cash flows which can be utilized to pay off the loans.
Loans are important to create assets, to buy things we need & also to upgrade our standard of living.
With due thoughts, discipline & right behavior we can manage our cashflows & loan books effectively!
Let’s Be thoughtful while spending & borrowing!