Tony needs to take immediate remedial actions. Being deeply in debt and unable to meet his obligations will not only affect his credit worthiness but also his saving for goals. He needs to make a list of all his debts, including the amount due (minimum amount or EMI due each month) and the lender. Having this information ready will help him plan his repayments better.
He will be able to draw his budget in a way so that the minimum monthly obligations on his debts are taken care of and keep the impact on his credit score to the minimum. He will be able to prioritise the repayments keeping the costs in mind. Tony could also consider transferring the balance on his credit cards to a low interest card or to a card that is offering the option of repaying the outstanding balance through EMIs.
The next part where Tony will have to exercise discipline and control is his current spending. He must not take on any new debt until his old debts are wiped out. It is important to cut back on all lifestyle and unnecessary expenses in order to repay his debts fast.
Tony’s spending and saving plan must be realistic and doable. His repayment plan must not be open-ended and must have an end-date by which he will be debt-free. He must set short-term targets. Achieving them will keep him motivated. Living on a tight budget as he pays off his existing debt should give him the discipline to live within his income and prioritise his spending even after he has eliminated debt from his life.
(The content on this page is courtesy Centre for Investment Education and Learning (CIEL). Contributions by Girija Gadre, Arti Bhargava and Labdhi Mehta.)