How to Keep Your Debts Low?

Spending is an art which can be learnt. Spending and being in debt are two different things. When prudence dictates your spending it can both be pleasurable and useful. But when you have to borrow there are a few tips to bear in mind. Consider these objectively to be able to effectively enforce them till it becomes second nature to you. Before we talk about the tips there is a term that I would like to introduce you to- debt-to-income ratio. This helps you estimate if you have too much debt.

The debt-to-income ratio (DTI) is basically a comparison of your monthly debt expenses to your monthly gross income. To calculate this ratio, all you need to do is to add up all your debt payments. Then divide this by your gross income. Multiply the result by 100. There are two types of DTI ratio:

Front-end ratio- This is a measure of the loan repayment towards house, insurance, property tax, etc.

Back-end ratio- This is a measure of the repayment of recurring debt payments like credit card, student loan, car loan, etc.

A high DTI ratio indicates that you have high outstanding debt, though it is the back-end ratio being high that should make you put on your thinking hat. And when you do start thinking here are the tips that you can begin with.

The availability of plastic money has made spending more a compulsive habit than a requirement. Most often we end up buying goods we rarely use and make-do with what we have. Impulse purchases and hurried buys sometimes do not serve the intended purpose. Therefore think calmly, make a budget, plan your expenses and borrow wisely. This may seem very difficult to implement, so the trick lies in allocating funds for unforeseen expenses from experience. Call it a ‘suspense fund’ or ‘emergency expense’, but set aside what you think best suits you to meet unplanned expenses.

If you end up using your credit card at every eatery that opens up in your locality, it spells doom both to your health and money. This is not a desirable situation as it increases your credit card debt. Some of us are in the habit of a complete entertainment every weekend beginning with movie, eating out and shopping combined into a single day. Spread these three activities over a month, so that you get your fair share of entertainment every week and you keep your debts low.

Sharing resources between family members:

We are living in a fast paced world where sharing is viewed as a waste of time and energy. Having two cars, two or even more computers, televisions, etc. seems to have become a norm within families. The wisest way to invest in a second resource would be to wait till you have enough funds to meet the expense rather than have two outstanding debts. Better still would be to close one debt before you borrow again.

Although credit card companies offer you the luxury of carrying your debt forward, remember that in the long run, the credit card company gains and you lose. Therefore, it is better to keep your outstanding as low as possible. This could prove to be very effective because you pay about 15% to 20% (average) interest on the credit card outstanding balance. So it makes sense to pay off old debts before you borrow again. This not only regulates your spending, but also reduces the additional expense that you incur in the form of interest. Pay off the higher interest card balances first. This will also help reduce the interest balance on the cards.

Every other day there are flyers reaching your door step on how much ‘free’dom there is outside your house. These are just marketing gimmicks to make you spend more. Resist the temptation to buy what you are definitely not in need of. The essentials that you need are available at cheaper rates elsewhere that you need to explore first. Remember ‘there are no free lunches’. For all the so-called benefits or free offers that you enjoy, you are paying without your knowledge.

If you know what you are planning to buy and if it does not involve a large sum of money, use cash. By doing this you will spend only on what you need. You must now & then leave the card at home, so that your debts don’t needlessly increase. Credit cards are no doubt a boon and help us save on time and printed money. Therefore, you have to draw a clear line between use and abuse depending on your needs.

 

While the tips discussed above may not suit those who are already spending cautiously, they must be viewed seriously by those who spend recklessly. Cautious spenders are advised to revisit their investment portfolio and ease up on the investments (say the insurance premium paid) and lessen the outgo wherever possible. Keeping a healthy cash flow for meeting the monthly expenses is also required.

Finally, drawing up a monthly budget is a prerequisite for your family’s financial health. Take time out at the beginning of every month to both draw out a plan for the ensuing month and check the previous month’s expenses.