Is There a Resilient Path to Steer Personal Debt in Times of High Inflation?

In another discussion in Good Cents by Union Assurance, Union Assurance delves into financial well-being to help Sri Lankans pursue their dreams. We are confronted with a challenge that impacts millions of individuals and families in Sri Lanka—the spectre of high inflation and its impact on personal debt.

In this discussion, Union Assurance aims to equip the general public with strategies, knowledge, and actionable steps to help reduce and manage personal debt in times of high inflation. The discussion was held with Lakmal Wijewardane, Assistant Vice President of Credit Risk Management at Nations Trust Bank.

Could you define, what early retirement means in today’s context and what motivates individuals to pursue it?

Inflation, in its simplest terms, is the rate of increase in prices of goods and services, resulting in a decline in disposable income. The impact of inflation on personal debt depends on various factors. Debt type, interest rates charged, repayment terms, and your commitment to debt management all play a role. For example, debts with fixed terms or fixed interest rates can have a favourable impact, shielding you from rising interest rates. However, revolving facilities such as credit cards and overdrafts can be vulnerable, especially if you carry large balances. Loans that are up for renewal at higher rates can also pose challenges. Facilities with structured repayments becoming due during inflationary periods will create additional stress on your financial situation.

What role do budgeting and financial discipline play in reducing and managing debt?

Budgeting and financial discipline are paramount in managing debt effectively. Firstly, you must understand your income sources, their frequencies, and the likelihood of receiving them. Identify and prioritize your essential expenditures, such as food, rent, medicines, and transportation, and include debt obligations like monthly instalments and credit card commitments in your budget. Knowing the interest rates on your debts, whether fixed or variable, helps you identify changes in your monthly financial commitments accurately. This comprehensive understanding enables you to plan, set targets, and stay committed to your budget, ultimately reducing your debt.

What are some practical steps that individuals can take to manage debt and create plans to eliminate them?

To manage and reduce debt effectively, consider the following steps:

• Create a budgeting plan: Identify non-essential or discretionary expenses that can be temporarily reduced or put on hold.
• Debt consolidation: Explore options to consolidate high-interest debts into a lower-interest loan or financial tool to decrease your overall debt burden.
• Cut credit lines: If you lack discipline, consider reducing or eliminating credit lines to prevent overspending.
• Rethink major expenses: Evaluate whether certain expenses, such as vehicles or living arrangements, are causing undue financial stress and make changes accordingly.
• Use savings strategically: If your savings earn less than the interest on your debts, consider using them to pay off high-interest debts.

Taking these practical steps will help you manage your debt and maintain financial stability.

What are the biggest mistakes individuals make when it comes to managing debt?

Some common mistakes individuals make in managing debt include:

• Lack of awareness: Not being aware of the extent of their debt can lead to financial trouble.
• Neglecting to budget: Failing to create and adhere to a budget can lead to overspending.
• Borrowing impulsively: Taking on new debt for non-essential projects without assessing the necessity can worsen financial situations.
• Minimum payments: Delaying or not meeting minimum debt payments results in additional charges and increased debt.

Awareness, budgeting, responsible borrowing, and timely payments are essential to avoid these mistakes.

How can individuals stay focused and motivated on their journey towards becoming debt-free?

Staying motivated on the path to becoming debt-free is crucial. Visual tracking of debt repayments provides a sense of accomplishment. Involving your family in financial discussions and decisions can reduce stress and help maintain focus. Remember why you borrowed and how debt has supported your goals, which can be motivating. Finally, commitment to your budget and seeing your debt obligations decrease will provide relief and motivation to stay focused.