It doesn’t take rocket science to understand that being in debt is not good for your financial health. Yet, lot of us fail to act and fall into the cycle of loans & EMIs. While we often treat debt as a financial problem (which it rightly is), it can impact other aspects of life too.
Here are some reasons why you should try to get out of debt as soon as possible, in case you are stuck in a debt trap.
- You actually save money – Pretty obvious! When you are paying back a loan, you are paying the principal and interest. And you end up paying more than what you need to (and often for something that doesn’t appreciate in value). Being debt free (and paying by cash, whenever needed) can help you save money, which you can, in turn, invest (hopefully!) towards your financial goals.
- Being debt free can make compounding work for you rather than against you. You can get your money grow rather than spending extra money on servicing the debt. Should you rather let compounding do wonders for your financial life OR let compounding get better of you?
- Less stress in life. – EMIs often add stress to your life. Doesn’t it? More so, if you see your savings in negative, and/ or are facing tough situation at home or work. Prolonged stress is detrimental to health. With being debt free you can at lease reduce one potential contributor to your stress levels! (On related note, read an interesting article on emotional effects of debt – on The Simple Dollar)
- You can create a cushion & provision for unforeseen circumstances. Examples – job loss, urgent health issue or anything which requires your immediate (financial) attention.
- If you do face unforeseen circumstances, and are unable to service the debt, this can have legal implications. And this can come at a huge cost – not just monetary.
- You get more flexibility to spend on things you love. This can be material or non material things. So if you are planning to take a holiday, you can probably take it with your savings without worrying much about your (non-existent) EMIs.
- Having debts to service is often symptomatic of bad money habits. The primary reason why lot of people are in debt is because they try to live beyond their means. (Read – Story behind credit card debt & personal loans)
- You can be on your journey towards FIRE if that is in your scheme of things. Being debt-free is a good first step towards financial independence. (Followed by diligently saving and investing money)
- Better risk taking capability. – If you wish to, you can quit your job or start a business or so something you really want – if you have some savings and no EMI to clear. It doesn’t make everything smooth. But it does make risk taking a lot easier.
- You actually own your assets and not your bank. Your house is not really your house till you clear off your home loan. Your car is not really your car till you clear off your car loan. The credit card collection agents can start hounding you before long. Get the drift?
While in some cases, debt may be unavoidable, it can be avoided in lot of other places. – By prudent planning (including emergency fund & insurance) and by having control over spending habits.
That being said, it is important to understand why you got into debt in first place. Usually the habits that got you into debt in first place, won’t be the same which will get you out of it. Isn’t it?