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Overview of Debt Reduction and Debt Planning

In today’s world were large investment and huge business opportunities are present in the world, businesses need huge amount of fund and proper debt planning for various business activities. It is obvious that such huge amount may not be readily available with the industry. Therefore, to get these funds, the business or individual, source funds from various sourcing entities in various forms. The business can get fund in various form like equity capital (own fund), debt (loan) or retained earnings (savings).

From the prospective of an individual mostly all of them want to have low cost of capital. Generally debt is considered as high in cost of capital in case of individual since he is using it for his personal requirement and not for business purposes. Since, obligation of repayment is attached to the debt and mostly from the mindset of individual everyone wants to stay away from debt. Thus, we are going to learn about how an individual can reduce its debt liability .

What is Debt Planning?

Debt planning is an important tool for reducing the existing debt and also to see that in future debt remain in manageable conditions.

There are some steps which need to be followed so that debt can be maintained at desired level so that proper utilization of resource (funds) can be done.

These steps are as follows :

To see how you fell into Debt Trap

The first and foremost important thing to understand is that you need to see how you fell into so much debt trap, is it our spending habit or there is any need to make internal changes within the organization or personal spending habits.

There is saying that we must not dwell on our but sometimes we need to look back for better and good future. Generally, it is seen that people are not interested into debt planning as not importance is given to it neither in school nor in practical life. Moreover, most companies have shortage of good finance planner to decide on debt structure.

Correcting your Mistakes

After, identifying your mistake that you made while spending, due to which there is increase in the debt. The next step would be to see that you stop making those mistake and take prompt steps so that immediate action can be taken for reduction of debt.

You can do that by making a monthly budget of your spending and looking into that, and trying to know where most of your money is going.

After, that tries to reduce your spending on that particular element. By this process you will be able to identify your bad spending habits and work on that thing.

Look into Books how much Debt you are in right now

After, knowing your mistake the next step would be to know in how much debt you are in. For that you need to make a list of all the debt from the books.

Try to calculate your monthly budget and see in which of element you can cut short the spending and divert that money into paying debt which is required to be paid on urgent basis.

Also, try to pay more and more debt by pooling more and more cash towards paying debt. You get extra cash by working on small projects in your office or doing a part – time job.

Paying off Planning

To get rid of debt, proper planning should be in place to have an overview about the debt which needs to pay off first and there should be list in sort. Example – which debt to be first and which one the second .

Following steps can also be taken for making proper paying off plan :-

• Which debt needs to be paid first?

You need to analyze that which debt needs to be paid first and then accordingly decide.

• Decide how much you need to be paid.

After, that you have decide how much you are going to pay monthly of that particular debt. In this way it would be easier for you to separate that much amount from monthly budget if you already know how much you are required to pay.

• Decide the time frame within which the amount shall be paid.

By doing the above two steps you will get the idea about the timeframe or within how much period you will be able to payoff that particular debt. It will help you to get an idea about the time required to pay off all the debt.

Knowing a timeframe plays an important role as it will boost the morale of the payee and he will be able to understand his paying capacity monthly or weekly. Since while calculating the timeframe sometimes many factors are not considered like increment in salary, interest rate or inflation so payee should try to consider these factors also.

• Start paying debt

The next thing to be done is to start making payment according to your plans and commitments and don’t deviate from your goals. Also, paying regularly will help you to be able to see whether the plan set by you is achievable or not and accordingly change your plan with changing circumstances and situations.

By setting milestone and achieving the same will help you to stay motivated and at the same time enjoy the small successes and celebrating the same.

• Start paying the next debt

If you are able to achieve your first goal i.e. paid the first debt then start paying the next debt and accordingly set up new goals according to the amount required to be paid back and time frame needed. Also, continue this strategy until you become debtless.

• Stop taking more debt

The next step that should be taken is to stop taking more debt since there is no use of planning this entire if you on other hand taking more debt. Also, some contingent funds should also be created by the payee for creating safety measures during some uncertainty.

Also, stop using credit card since swiping a card during shopping or making online payment is easy but the amount will start piling up that it would be difficult to pay back to banks. It has also been seen that most of people who get into debt trap is due to credit cards.

• Start saving more money

You should start saving more  money since if a person have some surplus money in his bank account it will provide some additional support to them  during the time of emergency. So , during emergency that person is not required to run behind lenders to get some money at high rates if he has already saved some bucks .

• Dealing with lapses

A person while executing may also face lapses from its set goal so in that case proper modification and adjustment should be made in plan so that the deviation should be minimized from the desired goal.

And when the lapse and setback is overcome then the person should get back quickly into paying the installments.

Conclusion

After, analyzing all scenarios we can say that it is not so difficult to become debtless if a person has a proper plan in place for paying the debt. In most of the cases it has been seen that a person gets into debt due to two main reasons :-

1. Due to overspending.
2. Due to lack of savings.

So, every person should focus on this key areas while debt planning and debt reduction. Also, they can also take help from consultants and other experts in these fields.

Also it is totally denied that debt should not be taken at all, in some cases it is beneficial to take debt when the rate of return on the amount invested is more than cost of capital since the margin gain would be gain for the person. So, it is concluded that while taking debt every person should think twice and should consider its advantages and disadvantages for himself before agreeing to take loan.

Also Read: Complete Analysis DEBT Recovery Tribunal in India