Recently Reliance Industries was in the news because it declared itself net debt free after it raised Rs 1.68 lakh crore in less than two months. Being debt free is important not only for behemoths like Reliance Industries, but even for small businesses and individuals. Let’s see why?
You get more money to spend: Mr X had a personal loan of Rs 5 lakh for which he was paying an EMI of Rs 18,000 every month. He got an insurance policy money-back and he used that plus some of his savings to pay off the high cost debt and closed the loan. Having done that, Mr X now has more money left in his hands every month and he feels that his family is livings slightly more comfortably now. Paying off your debts, especially the high cost ones, frees up your income and gives you more flexibility with your money. When you are debt free, you can spend on things you need without feeling guilty.
Makes it easier to meet your long-term goals: One of the most important benefits of being debt free is the ability to invest for long term goals. When you require less money to pay your outstanding debts, you can free up more money to invest for long term goals like children’s education, house, retirement and also build an emergency fund. Basically, getting rid of your debt frees up cash that you can use to invest for the future.
Closing her home loan early meant Miss Y could allocate more funds towards her children’s education. In fact, when you have a high cost debt, investing might be counterproductive. Let us say that you are paying 10 percent interest on a personal loan. In such a situation you would rather pay off the loan if you have money rather than invest it in an instrument that gives you a return of 7 per cent.
Helps you lead a stress-free life: It is a known fact that stress is the leading cause of lifestyle diseases. Debt, which leads to financial worries, increases your stress levels. All of us are exposed to some level of financial stress, but too much of stress is harmful and can lead to diabetes and heart issues. So being debt free can actually save your life. If you have a home loan EMI, there is a constant worry that you may lose your house if you fail to pay your EMIs.
Mr Z and his earning wife had a home loan, a car loan and also a personal loan. So, they were paying almost 50 percent of their salaries as EMIs. They were worried about how they would service the debt in case he/she lost her job or had a salary cut. Having paid off the personal loan and the car loan, now they are less stressed out.
Your credit score improves significantly: When you are debt free or even when you move towards zero debt, your credit score improves. Your credit score takes into account various factors. One of the factors is your payment history. If you have high levels of debt and have often made late payments or defaulted on your payments recently or in a regular manner, your credit score is likely to take a hit. Once you have paid off most of your debt and your debt is under control, your credit score will improve significantly. Also, if you have a high debt, you are more likely to use up more of your credit card balance. This would in turn affect your credit score adversely as it means an increased repayment burden. Being debt free or having manageable levels of debt will thus boost your credit score significantly. A good credit score in turn increases your chances of getting a loan and that too at a competitive rate of interest.
Here, one needs to understand that while the ideal situation is to be debt free, one should focus on getting rid of high cost debts like the personal loans and credit cards which fall squarely under ‘bad’ debt. On the other hand, ‘good debt’ like a home loan or an education loan is a good thing as long as repayments are made on time.
When you are planning your finances, your focus should always be on how you can pay off your debt and move towards being debt free.
After all, it directly translates to mean that you get a good night’s sleep!!!