What are the factors to consider before getting out of debt?



What are the factors to consider before getting out of debt?

 A majority of the population does not have basic amenities like a home and so people end up taking a loan after their job in order to provide for the same. It is very clear that a loan is taken only because of the inability to shell out all your money towards buying a home. One can't have a home and have nothing to eat. So yes, one ends up paying huge interest on the EMIs. As time passes by the disposable income of people increase and then arises a question. Should I repay the loan now and prevent myself from paying interest to the bank?

However, this question is not that straight. A variety of factors play a role in deciding whether you should pay off your debt or not. Here is a list of factors for in-depth understanding:

  1. The interest rate on the loan: The typical interest rate on a home loan is around 9% to 11%, which is significantly higher than what you get on a fixed deposit or a savings account. On the other hand, few people borrow money from their company or a bank at lower interest. This happens when you are an employee in the bank or a professional in a company. Sometimes, there is also an availability of interest-free loans from your near and dear ones. In both these scenarios, the borrower can act accordingly. In the case of high-interest rate, one should repay the debt and in the case of low-interest rate, one should continue to have debt and keep your accumulated money in an alternative investment.
  2. Additional tax benefits: The government also gives certain tax benefits on the first loan i.e. the interest payment on the loan is deductible from your taxable income. The current limit is Rs. 2 lakhs for a self-occupied property. If this deduction wasn't provided you would end up paying higher tax according to your tax slab. However, the benefit of the tax deduction is applicable only if you are in the taxable income range. The maximum tax you can save is 30% of 2 lakhs i.e. 60,000 rupees (assuming 30% tax rate).
  3. The interest rate on alternative investments: The interest rate on alternative investments would depend on your risk profile. If you are an aggressive investor you might be earning 15-20% returns on your investments. If you are a safe investor and you don't like taking huge risks, you might invest in fixed deposits or debt instruments. These investments give very low returns if you also consider the inflation rate. So, it is advisable that if you are able to make more interest in alternative investments than your home loan's interest, then you should consider not paying off your debt and vice versa.
  4. Liquidity Requirement: Sometimes, you do have funds but you need to consider your liquidity requirements. Everyone knows his/her fixed expenses every month in addition to some known future cash outflows. If you know that you will require the funds in immediate future i.e. 1-3 years, then you should keep the money invested in a liquid or bond fund and refrain from using the money to pay off debt.
  5. Emergency Requirements: Other than daily needs, one also needs to check if you are equipped to face any sudden emergency. There is always a possibility that there might arise a sudden need for funds, be it for health matters or other undesired situations. If you are thinking of spending all your money and that too without health insurance that covers all major diseases, then it would probably be a bad idea. But, if you hold health insurance and accidental insurance which covers almost all risks then you could consider paying off your debt.
  6. Age Bracket: The closer a person is to his retirement, the closer he is to a stage of no active income. It feels very overwhelming when one has to shell out huge EMIs from his retirement corpus or pension. If you are close to your retirement you should consider paying off all your debt as early as possible. However, if you are young you can consider keeping the loan.

Typically, one should not just pay off debt just because he has the ability, one should consider the above factors and analyze whether paying off debt would be good for one's financial health or not.

 Follow @rdhmfinance on instagram for latest updates.

 Thanks for reading!
Please comment on any financial query you had like me to address. I will try to post something worthwhile. 

Coming up Next: What is a systematic withdrawal plan and how does it work?

Comments

Post a Comment

Popular posts from this blog

What is a marketing funnel and how can you implement it in your business to increase sales?

Image
What is a marketing funnel and how can you implement it in your business to increase sales? "Yo dude, you need to increase your funnel size". Today, we will understand what does this phrase mean when some entrepreneur asks you to increase your funnel size. There are various ways of marketing available to capture potential customers, some being more effective than the other. A business's objective includes selling its product or service to maximum number of customers possible in order to garner the benefit of economies of scale and increase the revenue as well as the profit. Now, coming straight to the topic, a marketing funnel is a journey of any person who is the ultimate buyer of your product or service. The marketing funnel is so important that companies like Amazon, Ford, Bigbasket and Reliance Jio also use it. Observe the image below carefully that the funnel narrows down as you go down i.e. with each level of filtering the number of potential purchasers reduce. The ...
Read more

What factors to consider when taking a health insurance?

Image
What factors to consider when taking a health insurance? The following are the factors that need to be considered when taking a mediclaim or health insurance. Pre and post expenses:  The policies usually have a time frame under which the expenses are covered. You should see for how many days prior to diagnosis of illness and for how many days post diagnosis the expenses are covered. A good policy will cover 30 days pre-illness to around 90 days post illness expenses for a claim. Premium: There are many companies that offer these insurance policies, however you will notice that the premiums for the same sum assured will vary from company to company. Therefore, you should do a prior research about the premiums and then look for where you can save money. Bed or per day room charges: There are policies that will mention that we cover the hospitalisation expenses only if you use the general ward, however, better services are provided to people with private rooms. So, read the documents ...
Read more

Top 30 things to keep in mind when trying to start your first business?

Image
Have you been thinking of starting a business, but you get bogged down by the process, then you have landed to the right article. Listed below are the top 30 things to keep in mind when trying to plan and start your dream company: Product/Service: The first and foremost thing is to decide on what you plan to sell or provide to your clients. Basically, it is the idea that you want to implement. The way successful entrepreneurs approach this aspect is to solve a mass real life problem or a mass real life convenience that people didn't know they needed. Since business is something that you plan to do for a long period of time, choose a product or service that you are passionate about. This way your work doesn't feel like work but its fun to see things coming together. Sourcing of product/service: There are two options that you can either make your own product or ask a supplier for the same, but even if you are going to make your own product, in most cases you will have to get ra...
Read more