Independence Day special: Six simple steps to become debt-free at the earliest

Freedom is sweet, but sweeter still is financial freedom. But the fact is that many of us are slave to debt. As part of an Independence Day special series, Firtspost brings you today, the first part of its three-part series on financial freedom. Read on, for a step by step guide to be free of debt. [caption id=“attachment_2289066” align=“alignleft” width=“380”]  Thinkstock images[/caption] Step 1: Know where you stand  While it is easy to live from paycheck to paycheck, many who do so by swiping their credit cards for the newest cusine in town or going on holidays do not realise they are heading for a debt trap - a trap that will keep them enslaved for years together. The easiest way to know how deep you are in the water is by taking a simple test. If more than 50 percent of your monthly income goes towards servicing your EMIs on various loans, you are close to being in a debt trap. Even if more than 35 percent of your monthly income goes towards servicing debt dues you are half-way there. Step 2: Separate good debt from bad debt  While debt of any kind is ideally bad, taking some kind of debt these days is a necessary evil. Broadly, debt can be divided into two kinds - the good and the bad. A debt taken to fund an appreciating asset, like a home loan, is an example of healthy or good debt. After all, in the years to come, the value of your home can only increase. A debt taken to fund a depreciating asset is an unhealthy one. For instance, a 40 grand trip to Thailand on a credit card is unhealthy debt. Step 3: Collect and calculate total debt Collect all the loan and credit card documents at one place, and compute the total debt you owe. You’d be surprised to know the figure would not be the one you had assumed. Also know the total amount of curent bills, and dues and expenses you owe. For instance, your cell phone bill, utility bills and the like. Step 4: Set an order to pay  Start by paying off current utility bills and other current dues. Then start aggressively attacking the most expensive debt (highest interest rate), by paying as much as possible towards it. Put the rest in a descending order of cost. Pay at least the minimum amount due on all remaining debts. Pay as much extra as possible (over and above minimum due) towards the most expensive debt. Then zero in on the debt with the next highest interest rate, and so on. Usually, credit card is the most expensive (30-45 percent  interest) debt. Balance transfer on credit cards work well at lower interest of around 1.5 percent per month. Even taking a personal loan or loan against gold to pay off the credit card debt, work as a cheaper option, then servicing a credit card for years. Step 5: Seek help  If you are unable to handle the debt on your own, approach debt counselling agencies, like Abhay Credit Counselling Agency and ICICI Bank’s Disha Credit Counselling Agency. They provide free counselling to those struggling with debt. Another way is to discuss with a certified financial planner. Step 6: Always keep emergency funds  Never ignore the need to keep emergency funds handy, just because you start getting out of debt aggressively. Make sure, apart from servicing your current debts and aggressively paying a part of your most expensive debts, to set aside some funds for exigencies. Ideally, you should keep three months’ monthly expenses aside for the same. Now that you broadly know the steps to get out of debt, let your fight to defeat debt begin this 15 August. Aim to be debt-free by the next Independance Day. Good luck!!