Got a question about your money? What you should or should not do with it? Our expert Devang Shah has the answers.

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My monthly take home is Rs 21,500.

Loans
Rs 66,000: Debt on three credit cards
Rs 63,000:  Rs 75,000 loan taken in April 2005 with an EMI of Rs 2,826

Monthly expenses
Rs 2,000: given to my parents
Rs 2,826: EMI
Rs 4,000: Other expenses

Can you give me some practical tips to help me clear my debt within two years?

- B Sam

Your net monthly savings are Rs 12,674 (21,500 - 2,000 - 2,826 - 4,000). Let's take it as Rs 12,500.

If you use this for paying up your credit card debt, you should be able to clear that in the next seven months even if the rate of interest is 3% per month. Similarly, you should be able to pay off the other loan too. It appears to me that your Rs 63,000 loan is quite expensive i.e. 3% per month.

Technically, you should be paying off your most expensive loans first. But, if you are going to clear off these loans in the next 14 months, it will make very little difference in absolute terms.

There are a few other issues I would like to list out to you.

1. While you are not likely to have any problem paying off the credit card debt as soon as possible, the other lender may or may not allow you to prepay without a penalty. That will depend on your agreement with him. Please read your agreement with him before broaching the subject.

2. In case you are unable to prepay either of these debts, because of any issues such as prepayment penalty, then you will need to stick to the schedule of prepayment. If by doing so you still have surplus cash, keep accumulating it. You could put away this money in a floating rate income fund like HDFC [Get Quote] Floating Rate Income fund � Short Term Growth. Over here, the fund manager will invest in fixed-return investments that have a floating interest rate, not fixed interest rate.

3. Do you have other financial assets? Do you have other earning members in your family? Do you have a life insurance cover? Do you and your family have a medical cover? These are cushions you must have and, in my opinion, more critical than paying off your debt ASAP.

4. The most important issue is likely to be the cause of these debts. If these have been lifestyle expenses, even if you manage to clear of these debts right now, they will soon reappear. In that case, I have two suggestions for you.
Firstly, get rid of two credit cards. One is good enough.
Secondly, get a good financial advisor to assist you building up your wealth. The advisor would also be able to help you create a new lifestyle by addressing your attitudes, values and notions about money and wealth.

How wealthy you are is a result of your actions. Your actions are a result of your thoughts and your thoughts are a result of your beliefs. Investment management is only a part of becoming wealthy. The best investment advisor cannot help a client become wealthy if the client's beliefs do not support such wealth creation.

If these debts were incurred to meet unforeseen contingencies then your insurance might be requiring urgent attention.

Illustration: Dominic Xavier

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