Instead of messing up finances by panicking, debt should be dealt with a disciplined approach.

For millennials, life moves faster than fiction. A red Ferrari, beach house, foreign holiday or designer watch, ticking off the bucket lists is much easier today. Thanks to the magic wand the banking system has presented us – credit line.

However riding in the fast lane has its downside too. The longer we remain in the illusion that future will take care of itself faster the debt trap entangles us. Sometimes it becomes more than we can afford.

Repayment of debt has very little to do with money and much to do with perspective. So instead of messing up your finances by panicking, debt should be dealt with a disciplined approach. Sketch out a smart debt repayment strategy, stick to it and in no time you can be free of bad debts.  

You can start by getting into a written budget before the month begins. See how much you can afford to pay. If possible, get your income up and if needed sell off things which you don’t really need.

Putting things in perspective, Ankur Kapur, Financial Advisor and Founder, Ankurkapur.in opines “Being debt free, in terms of personal loan and credit card loans is very critical even before you start thinking of investments.” However, home loan and student loans should be your least priority as they provide tax benefits. To make the math easier Kapur breaks it down further.

Credit Card: In case of a credit card loan, approach your bank and take a personal loan to pay off your credit card bill immediately. A credit card loan carries an interest rate of 40 to 45 per cent. On the other hand, for a personal loan one has to pay around 14 to 16 per cent interest. This personal loan can be paid in a structured manner within 10 to 12 months.

Personal Loans: From the paying off perspective, the personal loan should be paid off first. And also you should not get into the habit of taking a personal loan.

Car loans: They are usually structured. But ensure that your tenure is as low as possible. People think that they can afford an ‘x’ priced car if they go for seven years. But that affordability should be linked with a three year EMI.

Home Loan: With respect to a home loan, whenever you get bonuses or extra payouts, try and allocate that towards the principal payment. That way your principal will start lowering down. Don’t touch your EMIs where your amount is fixed. Because if the EMI stays on the higher side, it will ensure that your overall loan gets paid off quicker.

Debt Repayment Strategies

Arguably there are two very effective methods of debt repayment – the snowball method and high-rate amount. 

Snowball method

Make a list of all your debt – lowest to highest. When it’s time to pay the bill, make minimum payments for all your debts. Put some additional amount to the smallest debt. Do this every month till you have finished paying that off. Next, take the money and start paying the second smallest debt.

High-rate amount

Again make a list of all your debt but this time arrange them according to the interest rates. Now after putting the minimum amount across the board, put the additional money in the account with the highest interest rate.

Snowball method of debt repayment is quite effective for people who fail to stick to a long-term plan. The happiness of small accomplishments motivates them to reach the next goal faster. Financial advisors, however, opine by approaching the high-rate amount formula we can save a lot of money in the long run.

Still, if you are unable to fix a debt mess, it is advisable to seek help of a financial advisor.