Finding Financial Balance: How to Achieve Financial Goals With No to Low Debt

Debt is a powerful tool that can help you achieve your financial goals, like buying a house or starting a business. However, it can also be a double-edged sword if not used wisely. Recklessly taking on debt can put you in a challenging situation of the debt trap and create long-term financial burdens. Whereas avoiding debt altogether can limit opportunities for growth and financial success. Therefore, striking a balance between taking on debt and achieving financial goals is crucial. This article elucidates why it is important to understand the trade-offs between taking on debt and achieving financial goals and practical strategies that can help you balance your debt and financial goals.

Let us first understand debt and how it impacts your financial life:

Debt is nothing but the money borrowed by an individual or an organisation with the promise to repay it as per a prespecified repayment schedule, usually with interest. There are broadly two types of debts; secured and unsecured. Secured debts are backed by collateral like a house or car, whereas unsecured debts like personal loans, credit card loans, etc., are offered without collateral and come with a high-interest rate. It is important to know that the interest rates of the loans play a vital role in determining the cost of your loan.

The biggest benefit of availing of a loan is that it provides an opportunity to achieve your financial goals that would otherwise be difficult or impossible to reach. For example, buying a home might not be possible for many individuals in their 20s or 30s without any financial support. However, the same people can fulfil their dream of owning a house in the early stage of the economic life cycle by opting for a home loan.

While taking on debt can help achieve your financial goals, you must understand the risks involved. Taking on too much debt can lead to financial instability in the long term. Hence, it is necessary to avoid borrowing more than you can afford to repay and have a solid repayment plan in place. You should also know the terms of the debt, including interest rates, different fees like processing fees, foreclosure fees, etc., and repayment schedules, among other things. Failure to make timely repayments can result in additional fees and charges and damage your credit score.

Now that you know why it may not be a good idea to take on a huge loan (which could prove to be a financial burden), you can take these steps to achieve your financial goals and make a conscious effort to reduce the debt burden:

1. Understand Your Financial Situation:

In order to find the balance between taking on debt and achieving financial goals, it is crucial to first understand your financial situation well by evaluating your current income and expenses, analysing your credit situation with debt-to-income ratio, credit score, credit utilisation ratio, etc., and identifying your family's short-term and long-term financial goals.

By understanding and analysing these things, you can make more informed decisions about borrowing, spending, and saving and take steps to improve your overall financial health.

2. Set S.M.A.R.T. Financial Goals And Classify Them into Short-term, Medium-Term, and Long-Term:

After considering your financial situation, the next step is choosing the appropriate financial goals. The likelihood that your goals will be accomplished within the intended timeframe will be reduced if they are not set appropriately. You can get started by listing your short-term, medium-term, and long-term financial goals, such as putting money aside for a down payment on a house, purchasing a car, creating an emergency fund, etc.

It is important to set the right financial goals by creating a budget, developing a debt repayment plan, and balancing debt repayment with savings. Setting realistic financial goals and developing a plan to achieve them can help you manage debt, build savings, and achieve long-term financial stability. By prioritising your goals, creating a budget, and balancing taking on debt and attaining goals, you can work towards a healthier financial future.

Take note that your financial goals should be based on your personal values and desires. Some goals may take precedence over others, such as saving for a child's education or planning an international vacation. You need to balance these obligations with your personal interests by creating a plan that includes all your goals. However, you must also consider the opportunity cost of each goal. For instance, if you choose to save for a car instead of your child's higher education, you could end up paying more for college in the long run. Hence, it is crucial to set S.M.A.R.T. financial goals that are Specific, Measurable, Achievable, Relevant, and Time-bound. This will keep you motivated and help you track your progress towards achieving your goals, even if you have other competing needs. By having a clear idea of when and how you will achieve each of your goals, you can manage your financial responsibilities while still pursuing your interests.

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3. Strike a Balance:

Effective money management requires striking a balance between taking on debt and achieving long-term financial goals. It necessitates giving your financial status careful consideration and having a clear understanding of your financial goals. You may accomplish your goals without jeopardising your financial stability by balancing these two factors.

To achieve this balance, you must first analyse your financial situation and decide on your long-term financial goals. To calculate the amount needed to reach your goals, you can utilise a variety of tools and services, including retirement calculators, investment calculators, and financial planning software. These tools might assist you in determining how much you will need to invest or save in order to reach your objectives.

When you know exactly how much you need to save to reach your financial objectives, you can start setting aside money for them while reducing the amount you borrow. It is essential to prioritise your goals, such as saving for a down payment on a home, paying off high-interest debt, or setting aside money for retirement.

Also, consulting a financial advisor can be beneficial in creating a solid financial plan that strikes a balance between your long-term goals and your current financial circumstances. A financial advisor can offer insightful advice and assist you in identifying potential risks and opportunities that could influence your financial goals.

Suppose you are planning to buy a house but lack funds for a down payment. In such a case, you might be enticed by banks and HFCs offering home loans with zero down payments. Although this may seem like an attractive option to fulfil your dream of owning a new home without spending any money upfront, there are several drawbacks, such as high-interest rates, increased interest payments, and the lack of equity built up, among others.

When you are buying a home to live in, you cannot consider it as an investment. Hence, it is best to keep the home loan EMIs affordable. Besides, the Reserve Bank of India (RBI) has once again increased the Repo Rate, which may result in additional increases in home loan interest rates.

A larger down payment demonstrates better repayment capacity. Consequently, if you make a larger down payment, financial institutions may offer more favourable loan terms. Instead of increasing your debt and, thus, your EMIs, it makes sense to increase your home loan down payment while not excessively stressing your budget, which will eventually help in reducing total interest outgo.

Furthermore, making a larger down payment allows you to own more equity in the property, reducing the need to borrow a large home loan. Remember that the lower your loan amount, the sooner you will be debt-free.

4. Make Informed Borrowing Decisions:

While taking on debt is a necessary part of achieving many financial goals, making responsible and informed decisions about borrowing is essential to avoid putting yourself into a debt overhang and damaging your credit score.

Here are a few tips that can help you make informed borrowing decisions:

• Avoid costly debts: Each loan has its own interest rate, repayment terms, and potential risk. As discussed earlier, unsecured loans carry higher interest rates compared to secured loans. Unsecured loans like personal loans and credit card loans can quickly accumulate and become difficult to manage. Hence, it is advisable to avoid taking on such loans and avail of them only in case of an emergency.

• Do thorough research before borrowing: When you are planning to borrow, it is a good idea to compare interest rates and other fees from different lenders to find the best option for your needs. It is recommended to choose a lender that offers competitive interest rates, lower fees, and flexible repayment terms.

• Consolidate your debts or refinance loans: Debt consolidation and loan refinancing are effective tools for managing debt and reducing interest payments. You can consider consolidating your costly loans into lower-interest loans or refinance existing loans to take advantage of lower interest rates.

Apart from this, making timely repayments of all your loans will help in avoiding late payment fees, high-interest payments, and damaging your credit score. Hence, it makes sense to automate your repayments to ensure that you do not miss or delay any repayments.

Here's how you can invest towards your financial goal and lower your debt burden:

Reducing debt is a great way to save a significant amount of money and achieve your objectives. If you cannot afford to make the minimum down payment required to lower your debt burden and interest outgo, it is better to postpone your purchase and develop a strong financial plan to make a higher down payment.

To accumulate the remaining amount, it is suggested to invest in equity mutual funds through the SIP route, which will enable you to gradually create a corpus and generate inflation-beating returns. Online tools like SIP calculators, which are readily accessible on various financial websites, can assist you in determining the precise investment amount required to meet your desired objectives.

At PersonalFN, we understand that not everyone can have the required knowledge to select suitable mutual fund schemes. Many people hesitate to invest in market-linked financial instruments due to a lack of market knowledge and fear of market volatility.

To conclude:

Achieving financial stability and managing debt is a continuous process that requires balance and responsible borrowing. It is important to find a balance between taking on debt to achieve financial goals and avoiding unnecessary debt that can lead to financial stress. By understanding different types of debt, setting realistic financial goals, making informed borrowing decisions, and striking a balance, you can work towards a healthier financial future.

KETKI JADHAV is a Content Writer at PersonalFN since August 2021. She is an MBA (Finance) and has over seven years of experience in Retail Banking. Ketki specialises in covering articles around banking, insurance, personal finance, and mutual funds and has been doing it for over three years now.