A dummy's guide to set you FREE from DEBT

In spite of steady, regular income there are many individuals who live paycheque to paycheque, carry their credit card outstanding, and fail to save anything for retirement. If you belong to this tribe, now is the right time to take urgent action.

You can not only come out of debt but also stay out of it. It is not only possible, but also unbelievably achievable.

In case you need some inspiration before you embark on a plan that will set you free from debt look at the humble postage stamp.

Its usefulness consists in the ability to stick to one thing till it gets there. Similarly, you need to stick to your debt pay off plan till you get out of it.

Here are 11 tips to help you stay out of debt.

The author is Ramalingam K, an MBA (Finance) and Certified Financial Planner. He is the director and chief financial planner of Holistic Investment Planners (www.holisticinvestment.in) a firm that offers Financial Planning and Wealth Management. He can be reached at ramalingam@holisticinvestment.in.

1. List down all your debts

You need to take stock of all your loans. It could be credit card dues, personal loan, car loan, housing loan, education loan, loan from insurance policies, loan from your employer, and so on. For each and every loan you need to note down how much you owe, the present interest rate, equated monthly installments and number of months to be paid.

2. Negotiate for lower interest rates

If you could negotiate the interest rate and bring it down then you can come out of debt faster. Most of the credit card companies come forward for negotiation if you really show interest in repaying. They need not run after you to collect the debt. It will reduce their expenses. So they will be happy to negotiate.

Balance transfer offers from credit cards are also a way to reduce your interest rate.

3. Refinancing and consolidation

Replacing an existing loan with a new loan is known as refinancing. By doing a refinance you could reduce your interest rate and it should bring down the time duration of your debt. But most often people go for refinance that provide them lower EMI thereby increasing the time they stay in debt.

4. Categorise your debt

Housing loan can increase your net worth over a period of time. Housing loan gives you tax benefit also. For a businessman, car loan provides some tax benefit. Based on these factors debt needs to be categorised. This will help you compare different loans.

5. Prioritise your debts

After sorting out various loans, you can comfortably prioritise your loans. Obviously this will be based on the interest rates and tax benefits. At times paying off a small loan first can give you a lot of motivation to get out of debt.

6. Creating and executing a debt payoff plan

You need to create a debt pay off plan with different scenarios. So that you can find out how some more savings or a different repayment order will help you to get out of debt faster. When creating a plan, you need to choose the one that is comfortable with your attitude. Otherwise, you may not execute it properly.

7. Refrain from applying for fresh loans

You need to take a vow that you will not be adding any fresh loans, till you come out of all your debts completely. Think for a moment, how you will feel when you become debt free. This will give you a lot of positive energy to come out and stay out of debt.

8. Postpone buying major assets

Buying a property or any other asset needs to be postponed till you get out of debt. With your new ownership comes a new, probably large and unpredictable expense. This can deviate you from your debt pay off plans and at times the consequences could be uncontrollable.

9. You stop using your credit card

There are two types of people. One group of people uses credit cards responsibly. That is they will repay the credit card dues in full when they receive the bill. The other group will pay the minimum amount due and carry forward the balance amount due.

If you belong to the latter group, you need to stop using credit cards temporarily.

Take out and keep your credit cards in the locker. Once your financial situation and buying habits improve, then you can start using your credit cards again.

10. Change your spending habits

Being in debt obviously means that you have been living beyond your means. The solution is very simple. Spend less than you earn and you will get out of debt soon. You need to change your spending habits. Then only this simple solution will be achievable.

If you buy things you don't need, you'll soon sell things you need. Don't save what is left after spending; spend what is left after saving.

11. Involve all your family members

You must inform all your family members and dependents about your debt status. You will be able to take decisions with much more clarity. Moreover, if your family members know about your debt, they will also change their spending habits and support you in getting out of debt faster.