2022 has been the “Year of resilience” for India, largely driven by strong domestic consumption, which saw pent-up demand soaring for everything from homes to cars and consumer goods to services such as hospitality, travel, and leisure. Retail Credit has grown almost 20-25% and that has been one of the drivers for economic growth. So whether it is at an individual level or at an economy level, there is no denying that credit is essential. At an individual level, borrowing helps one meet one’s goals and aspirations. However, it is important to look at it responsibly and remember that financial discipline is the key to financial growth. There is no better time than the new year to adopt some resolutions to bring some financial discipline in life. So here are five financial habits to become a more responsible borrower in 2023
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Make a budget – Repaying loans in a timely manner is your responsibility and one of the ways in which you can bring about discipline in doing that is to create a monthly budget. Put pen to paper and take into account how much you are earning post taxes, your essential expenses including any EMIs to be paid, monthly savings etc. This will help you assess your repayment capacity and ensure you don’t over-borrow. Having taken a loan, the budget will help you stay on track with your expenses.
Know your debt – Interest is not the only cost you incur for your loans. There are processing charges, administrative fees, and other associated costs. Ensure you do a thorough evaluation of competitive loan providers to get the best deal. Do read the fine print and all the terms and conditions carefully and be in the know of the penalties and interest that can be charged, should you skip an EMI or two. Most importantly remember there is a cost to debt, so refrain from quick temptations of converting expenses to easy EMIs. Don’t confuse what you ‘can’ borrow with what you ‘must’ borrow.
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Be prompt with your repayments – Payment history is the most important factor of your credit score, which makes it essential to pay your EMIs on time. Set up your own reminders or use the bank reminders to unfailingly pay your dues on or before they are due. Use the auto-debit facility of your bank to schedule these payments. Always remember to pay your credit card outstanding in full every month. Paying the minimum payable means that you are not only carrying the debt but also being charged a higher interest on every fresh purchase you make on the card.
Use surplus money wisely – Whether it’s a bonus, tax refund, money coming in the pocket spurs the question of how it can be used, whether to pay off debt or invest the money. Perhaps you can have your cake and eat it too by doing a bit of both. By paying off some part of your debt, you save money on the interest expense, but you also get the interest on the money invested, while creating a pool for the rainy day.
Prepare for the unexpected – The best-laid plans can go awry, so one of the ways that you can give yourself real peace of mind in 2023 is by establishing an emergency fund that acts as a safety net. Keep aside funds in an easy-access savings account or liquid fund, which you can dip into when unexpected expenses arise. A general rule of the thumb is to hold 12-18 months of expenses including loan EMIs. Having money you can access if you’re in a tight spot means you don’t have to resort to expensive borrowing. It also means your savings, investments or pension contributions are not disturbed.
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There is nothing wrong with using debt to fulfill your current aspirations and desires, but it is important to be disciplined about loan repayment. If you repay your loans on time, then you will have a good credit score and a credit history. Defaulting on EMIs will adversely impact your score and in turn, make it difficult for you to avail of future loans. Being a responsible borrower is a commitment to your own financial freedom and one way towards it is to convert your financial resolutions into a habit. Not all of it may be possible at once perhaps, but well begun is half done. So this New year, commit to making some real progress on your financial well-being!
