India is celebrating its 78th Independence Day tomorrow.
This Independence Day is a good time for you to take concrete measures to be debt-free. When the debt level is exorbitant, it not only puts your wealth creation plan in jeopardy but also whittles away a sizeable part of your income in the form of interest.
Let us understand this with an example. Suppose your income is ₹2 lakh, and 10 per cent of this income goes towards interest payment; then you are left with ₹1.80 lakh after the interest payment.
Now, imagine if you didn’t have this loan to service. You would have a higher income that you could save and invest.
“To be financially free, one should be debt-free. This is a primary condition for calling oneself financially free. But for the long-term wealth creation, does one always need to be debt-free? Not really. Long-term wealth creation is a process that one must follow with discipline, focus and meticulous planning,” says Preeti Zende, a Sebi-registered financial advisor and founder of Apna Dhan Financial Services.
“I often tell my clients to borrow money only when it is absolutely essential. It is better to delay gratification rather than borrowing money to spend,” says Deepak Aggarwal, a Delhi-based chartered accountant and wealth advisor.
Why you should clear your debts first:
1. Stumbling block in wealth creation: Debt can be a big drag on your wealth creation and can slow down the process of achieving your financial goals while you are on your way to financial freedom.
So, it is imperative that you clear your debts as soon as possible to meet your financial goals as quickly and optimally as possible.
2. Pilferage in your savings: The old saying is that a penny saved is a penny earned. If you don’t have a loan to clear, you can use the money to save and invest.
3. When to rely on debt: Whether you want to buy a car, go on a holiday or invest in a property, there are two ways to do it: Either save money over time and eventually buy it, or borrow money to buy the asset and repay the loan over a period of time. The first method is always more financially wise unless you need to buy something urgently, which otherwise would take several years.
“Good debt is surely helpful which helps you to build your assets and helps you to upgrade your knowledge and skill. The first example is education loan. With an education loan, you can take a course that can help you upgrade yourself and increase your primary income in a bigger way to achieve financial freedom early. The second example is a loan for working capital or business loan which helps you to expand business and increase business income multi-fold. Thus, you can have such good loans in moderation to help you achieve long-term wealth creation early; but yes, excessive good loans also take a toll on your finances,” says Zende.
4. Power of a habit: The problem with borrowing your way to acquire assets is that it quickly turns into a habit, which should be avoided at all costs.
Before you know it, you will have multiple loans to service and as many auto debits, which will deplete your savings bank account. This is not only financially irrational but can alsolead to anxiety for the borrowers.
5. Ward off a debt trap: Many people who earn a good salary take out loans in a bid to acquire assets. As a result, they invariably fall into the debt trap.
So, this Independence Day, make a conscious effort to come out of the debt trap and expedite your journey to wealth creation and financial freedom.