HOW TO GET DEBT FREE?
FINANCIAL PLANNING at DIFFERENT STAGES OF LIFE
We have different stages of LIFE. Once childhood and education stage gets over, we need to shoulder Economic Responsibilities. In our career, there are stages like;
- Initial (Age 25-30)
- Stabilizing (30-40)
- Established (40-50)
- Matured (50-60)
- Retirement (60+)
- Initial Stage (Age 25-30).
This is a beginning of career. There are all the uncertainties. Level of income is low. One cannot save easily. One should not take any risk. One should not try to set higher standard of living. One should not spend unnecessarily. One should not borrow, because one may not be able to service the debt. It is better stay in rented property than own.
- Stabilizing (Age 30-40).
This is a second stage. One stabilizes in a career little bit. There would be marriage followed by Children. Level of income and expenses both go up. There are needs of capital expenditure like house, vehicle etc. Requirements of capital expenditure cannot be met from saving. So there would be a need for borrowing like housing loan, vehicle loan etc. One can take calculated risk of borrowing with repayment within means. Saving potential is built gradually during this phase.
- Established (Age 40-50).
This is the phase when one becomes comfortable. Income levels are good and so standards can be raise. Saving potential goes up substantially. So this is the time for retirement of debts and investment. If this stage is carefully planned, life becomes easy financially for the rest of the life.
We have different levels of incomes and expenses at different stages of life. In earlier period of the career, income is low and expenses tend to be higher. Level of saving and investment is very low. There are requirements of Capital Expenditures that can be met only through borrowing. So debts are created for fulfilling certain basic needs of good living. For example loan for home and vehicles.
For such debts, we need to pay instalments comprising of principle payment and interest. Many times, additional debts are required to be taken. Point here is that we need to borrow and create debt in life, particularly at the early stage of career.
Question is how to address such debts and become debt free?
Well there is a way to phase out debt faster by using Mutual Fund. It is also a fact that within 5-7 years of career, one settles in job/profession. Obviously income grows fast. From this point, we can spare fund more easily and save. Income rises faster than expenses. With moderation, expenses can be curtailed. Certain capital expenditure items can be differed and postponed. So we can save more.
This saving can be channelized in Mutual Fund investment. SIP would work out a better option. At this stage, in addition to repayment of loan, there is a saving that can be invested in mutual fund through SIP.
With the repayment of debt, outstanding is reduced and with investment in Mutual Fund through SIP a new corpus is created. In present time, stock-market returns are very healthy. So good amount of fund can be created through saving and investment in Mutual Fund.
A stage can come when investment in Mutual Fund exceeds the outstanding debt. Part debt of full debt can be redeemed from Mutual Fund investment. So once can become debt free. Obligations are cleared faster.
This would help a person so save more since there are no interest and instalment payments to be made and invest more in Mutual Fund. Investment Value goes up fast. Once can create a decent investment portfolio.
For example, someone has taken housing loan of Rs. 25 lacs. He is supposed to pay Rs. 25000 per month for 20 years. (Rent is saved, so one can repay from such saving). For first 5 years, normal repayment goes on. After 5 years, one starts investing in Mutual Fund SIP in addition to repayment of loan. In another 5 years, this investment value swells to Rs. 10 lacs. This can be used to repay outstanding housing loan. So a debt that was supposed to be cleared in 20 years can be repaid in 10 years with the help of Mutual Fund investments.
After 10 years, savings and investment can be steep, enabling us to create wealth very well.
Concluding, one should borrow only to the extent required (not for undue luxuries), and then save more than repayment obligations, park it in Mutual Fund investments and go on repaying debts faster than stipulated and become debt free (and tension free).
Prudent SAVINGS channelized in to prudent INVESTMENT can make you debt free faster and make life happy.
-Mr Hemant Desai