“My debt is spiraling out of control. I need a solution. Please help me.” I received a phone call recently that made me write this. This individual has outstanding mortgage loan installments, personal loans, credit card dues and other overdue utility bills.

The reason for the above situation is a lack of financial literacy and discipline. Even among the educated, the degree of financial illiteracy is high, which they admit only privately.

Having debt is not a bad idea. One may not have adequate liquid cash with him for the purchase of a house property, vehicle, marriage, education of children, etc. A long-term debt like a mortgage is ideal if properly conducted, considering the level of inflation. But the problem starts with multiple borrowing without looking into the cash inflows.

It is important to know the total debt ratio.

In corporate parlance, it is called the Debt-Equity Ratio (DER). It measures the gross annual income required to pay the debt obligations. The total debt ratio is arrived at by dividing your total monthly repayment obligations including credit card payments by your monthly income.

For example, your monthly repayment obligation on your various loans like housing, vehicle, education and credit card is say $40,000 and you have a monthly income of $100,000, the total debt ratio is 40 per cent. Ideally, this ratio should not exceed 30 per cent. Any ratio above 30 per cent gives a warning signal. Lenders also do not favour loans whose total debt ratio is more than 40 per cent.

STRATEGIES FOR BETTER TOTAL DEBT RATIO

As mentioned earlier, having debt is not a crime. But overleveraging is a crime. In today’s complex, financial landscape, the strategies for improving your total debt ratio cannot be overemphasised. The following are a few tips can help you to manage your financial health wisely.

DEVELOPING A CULTURE OF FINANCIAL DISCIPLINE

The first and foremost among all strategies is to inculcate a habit of financial discipline. Practice the art of combining financial discipline by proper planning, budgeting and strict implementation.

A properly drawn family budget can help you to a large extent in this regard. Tracking expenses and avoiding impulse purchases also are important.

PRIORITISE YOUR SPENDING

Identify areas where you spend more as well as look for opportunities to cut costs. While one has no control over certain expenses which are mandatory in nature, controllable expenses can be minimised. It is a fact that not all expenditures are equally important. Making conscious decisions about how to spend your money is very important.

DEBT CONSOLIDATION

Debt consolidation is a debt managemeAnt strategy that combines all your loans under one umbrella. If you have multiple debts like overdrafts, credit card loans, purchase loans, or personal loans, bring it under one head for better management. This will not reduce your debt, but you may get a lower rate of interest and convenience.

SAVINGS HABIT

Save at least 10 per cent to 15 per cent of your gross income on a regular and consistent basis. Savings is a very difficult decision and always people postpone. Remember, the power of compounding can really help you to grow your investment multifold. Not only this, this may help you during exigencies. Also, try to practice the art of diversified savings and investments to achieve your financial goal.

REVIEWING STRATEGIES

Periodical review of the strategies followed by you needed to be reviewed at periodical intervals for several reasons. This may be required to match the changing market scenario, shifting goals and new information and insights. Revisit your strategies based on the above to improve the financial discipline.

Undoubtedly, leverage is a personal risk tolerance. However, by following the above strategies, one can effectively manage overleveraging and achieve financial discipline. Remember, managing your total debt ratio is very critical as this can reduce financial stress and improve your overall quality of life.

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