Things To Keep In Mind Before Taking Debt

Outlook Money


Taking debt can be considered good for finances if it helps in building wealth. For example, a loan. However, other kinds of debt, such as high-interest credit card debt, excessive borrowing, and unmet EMI dues are not so healthy for finances.


1. Things To Keep In Mind Before Taking Any Debt: Take Stock

It’s important to analyse finances before taking debt. One should begin by getting a stock of the situation i:e; by understanding fixed commitments, existing EMIs and actual interest costs being charged on all loans outstanding. 


2. Split Mandatory & Discretionary Spends:

One of the most effective strategies for reducing debt is by identifying the spending pattern and then categorising it into mandatory and discretionary. One should try reducing discretionary spending to increase the monthly surplus.


3. Debt Avalance Strategy:

One should prioritise repayments of loans with high interest rates as they cost more over time. Replacing/repaying the highest-cost debt first can be effective in reducing the debt burden. 

Interest Rate

4. Build an Emergency Fund

It is important to build an emergency fund that can take care of the fixed expenses for at least 6 months. This can help in unforeseen situations like losing a job or getting sick etc. and hence, can prevent the burden of debt. 


5. Good Debts and Other Means

Staying in debts that provide tax benefits such as home loans and education loans can be helpful. One should ensure payment towards the minimum due on credit cards to avoid late fees or penal interest rates. 

Compiled by Syed Muskan

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