I have always been that person who intentionally avoided debt like a plague. Not because I believe debt is bad, but because I believe one should take debt only when necessary. I am a big believer of living debt free is the shortest route to financial freedom. I have lived most of my life knowing if I can’t afford it, it’s not a necessity and more so reminding myself to live within my means.
That being said, a few weeks ago I took my first big loan. Okay, let me stop being dramatic, it’s not that huge but am stuck with it for the next twelve months. However, it was a necessity and I consider it to be good debt. But, if am to be honest, even after doing my analysis and having a solid payment plan, it being my first ever grown up loan, it makes me scared as hell. I can’t stop worrying about what shall happen if things don’t work out as planned. However, here are a few things I have done to ensure I manage the debt effectively and have a peace of mind.
- Ensure its good debt
Just as I had earlier said, I consider my debt to be good debt, if there is even anything like that. All monies borrowed went to the investment of my project (maybe I will share the details in future) which expected rate of return is more than my interest payment. I did a budget for my project and only borrowed over and above what I had saved. I am a big believer of not going fully in-debt to start new projects as the cost of debt is usually quite high and on other other hand we have no certainty of the project fully succeeding.
- Have a repayment plan
Before I borrowed, I prepared a repayment plan and shared with my creditor. Always remember not planning is planning to fail. In the plan, I had three scenarios; okay/normal, bad and worst scenarios. It is okay to be optimistic about our projects, but it’s always important to be prepared for the worst. Remember, in most cases, we are not in control of the market forces. Those are set by the market, so all we can do is hope for the best. And most important I ensured that my payments are based on stable income and not unsure income from unstable side hustles.
- Make extra payments
I made a conscious decision to pay extra payments as and when I get extra money. My normal payments comfortably fit within my financial capabilities. This was important to ensure I always make my payments on time and I do not fall behind with my monthly bills. I have however readjusted my life and came up with extra coins here and there to add up on to my normal payments. It’s not a lot, however, it will reduce my payment period and the cumulative interest. In addition, I have spent three-quarters of my Christmas bonus to pay the loan. This has made quite a significant difference.
- Not over committing
Now that I have an active loan, I have made conscious decision not to take up any more financial commitments at the moment regardless of how small they are. I do not want to have more than one loan at a time as it may become overwhelming. Any new financial obligations shall be done after I have fully repaid the loan. I know opportunities come and sometimes we do not want them to pass, however, patience and discipline are key. We can’t have it all.
And as I once read, Debt is not a tool; it is a method to make banks wealthy, not us! The borrower truly is a slave to the lender!