LESSONS

Your Debts: How did they begin?

You have a debt problem when, regardless of what you try to do, you are always behind on making payments, and never seem closer to complete clearance of your debts. The first and wisest thing you can do is to realize and admit that you do have a serious problem. Next, it is important to locate what got you into debt initially. Let’s consider your current debts.

Are they the result of a few major purchases like a car or consumer durables? (This could mean that you tend to stretch beyond your means, trying to live up to the Joneses and finally impressing no one at all, since you now have huge debts!) Have they accumulated over several minor purchases? (Then you need to take firm control of the way you shop, making a list, strictly sticking to it and avoiding impulse purchases!) Getting to the root of your problem will go a long way towards helping you solve it. Also, realizing that you need help with some areas of your money management practices will definitely help improve your finances in future.

Make a list of all of your current debts. Dig out your credit card statements of the past twelve months, and honestly label each purchase as a ‘necessity’ or a ‘non necessity’. (Medical expenditure IS a necessity. Weekend getaways are NOT necessities.) Next, categorize your non necessity list into dining out, leisure activities, impulse purchases, etc. This will help you identify exactly where and on what you are overspending, so you can cut down in these areas.

The next stage is getting in place some rudimentary financial skills, which will help you to track and understand your financial situation.

Your Money: Where is it going?

You know how you got it. But do you know exactly where it goes? Keeping tabs on your hard-earned cash, on what it is spent and planning future spends can change your entire life. Some people may say that they have difficulty doing the math. But it is quite easy with a little time and education, and it will make a world of difference to you, ensuring you become a better spender who is less likely to fall into the debt trap. As a first and most important step, learn to balance your income and expenditure.

Your Income: What is the source?

A critical way to discover precisely how much you earn is to identify all your income sources. Exactly what is your monthly income and expenditure? Make a table that traces where your finance comes from, in order to establish and stick to a budget.

1. Sources of Income

2. My Income (Net)

3. My Partner’s Income (Net)

4. Income from Rentals

5. Other Income

6. TOTAL

Your Expenditure: On what do you spend?

The single most crucial aspect of financial discipline is determining what you spend on, and why. Take the time to calculate what you actually spend per month, and it may completely surprise you. Tiny expenses, when accumulated over just one month, can work out to a big amount. Calculate your fixed (house rent, for instance), variable (telephone bills) and optional (travel) expenses over the last month. Keep looking for places where you can cut back, such as buying less expensive brands, buying things on sale or eating out. Now replace these new figures in the monthly statement. How much of a difference have these few changes in spending made to your total monthly expenses?

Exactly what do you owe? To whom?

If you have multiple credit cards and joint accounts with your partner, it will be difficult to find out exactly what your outstandings are, and to track your creditors. You need to become familiar with every little aspect of your finances, and to this end you need to make a list of what you owe, and to whom. This habit will help even when you clear all your debts, since awareness of what you owe from month to month can positively impact your spending habits.

Budgeting: An absolute priority!

At this point in the process, you know what you earn, what you spend, what you owe, and to whom. It should be a fairly simple thing to put a monthly budget in place, and ensure that you stick with it. What is really exciting is the fact that you can now automatically see in which areas you could save, how much you need towards paying off your debts, and how best you can spend your income.

1. Home Loan

2. Groceries

3. Education

4. Utility Bills (Electricity, Water, etc.)

5. Car/ Bike Loan

6. Other Expenses

7. Savings Account

8. Long Term Investments

9. Emergency Fund

Once you have your list of monthly expenses (on an average), minus the total amount from your income. If you have a balance left, you’ve done a great job. If not, you might need to rework just a bit, cut down the expense a little more. Once you can see a balance, then you can apply it on a priority basis towards paying more of your debts. Your second priority would be to save for future contingencies. Now comes the best part: When all this has been taken care of, go ahead and reward yourself each month with something small that you wanted to purchase.

Transform your thinking.

In your friend circle, you would have come across someone who always seems to be loaded with money, while someone else, though s/he has a sizeable income, always seems to be in debt. And you may have wondered why this is so. Financial experts have postulated that behavioral patterns and one’s sense of self-worth have more to do with this situation than income does. For sure, if you have debt but cannot change your relationship with money, you always will be in debt. Only when you transform the way you think about and view money, will you succeed in breaking free of debt, and breaking into a life of financial security.

What lies beneath the drive to spend or to save is an individual’s frame of mind. A man with fragile family ties, or a woman with low self esteem when it comes to men, tends to have spending issues. In this case the person tries to prove or improve something by doing the wrong thing: Spending money that just isn’t there. Of these people, approximately 25 percent are compulsive spenders who need professional help, but the rest just need to face and overcome their problem by resisting the urge to use credit that is easily available.

Parents must impart financial discipline to their children early in life. Women must learn to stand up for themselves. And men should stop trying to impress family, friends and colleagues with purchases. Above all, a positive mindset about money needs to be inculcated, where one keeps an eagle eye on one’s finances. Paying with cash instead of swiping a card while shopping is a true eye-opener on how much one really spends.

Credit Report Errors: Find and Fix Them!

You can apply for a credit report from the Credit Bureau either CIBIL, Experian or Equifax.This is what determines the kind and amount of loan you can get, since it contains your financial history.

Let’s assume that you’ve received your credit report, and have noticed expenditure that you did not make, or that a financial institution informed Credit Bureau that you have not paid something when you actually did. Credit reports errors are common, but you can do something to correct them. If you do find an error in your report, write down everything (who, what, when, where and why) so as to have an accurate record. Now write to Credit Bureau outlining the error, enclosing the proof you have as well as providing a copy of your credit report. Using a credit dispute form will simplify things a lot.

Next, contact the financial institution that reported the error with the same information, including copies of supporting documents. You will now have to wait for 30 days. If you do not hear from them within 30 days, contact the customer service department. If the financial institution decides that your case has merit, they will send a new credit report to Credit Bureau. If they do not decide in your favour, you can send them a statement about the situation, and include it in your report.

Your Legal Rights

Several laws exist to protect you from creditor harassment and abuse. If you feel you have a case against a creditor, you should contact a lawyer to learn your options in detail.

As per RBI Guidelines, debt collectors cannot use unfair, deceptive, or abusive practices to collect debt. Please refer to the RBI Guidelines:

DBOD.No.Leg.BC.75 /09.07.005/2007-08
April 24, 2008

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