How to regain control of your finances after festive overspending

Replace high-cost credit card debt with lower-cost loan against an asset

J Choudhry (name changed), 32, an assistant director based in Mumbai, had a wonderful Diwali this year. He was able to get mouth-watering discounts on a mirrorless digital SLR camera (Rs 79,000), a Shure SM7B mic (Rs 43,000), a few more gadgets for his soon-to-be-launched YouTube channel, as well as Diwali gifts for his family. All these items were purchased on credit cards, no-cost EMIs, and using Buy Now Pay Later (BNPL) facility. While the easy borrowing and spending gave him a high, that has now given way to a post-festival hangover of EMIs that exceed 40 per cent of his income.

Like Choudhry, Diwali spending has derailed the finances of many others. Adhil Shetty, chief executive officer (CEO), Bankbazaar.com says, “Impulse buying is common during the festive season. The availability of no-cost and low-cost EMIs has made it easier to be an impulsive shopper and to overspend.” 

Know where you stand

First, establish the extent of your overspending. Vishal Dhawan, board member, Association of Registered Investment Advisors, says, “Your bank statements and credit card statements for the past 24-36 months will allow you to compare your normal spending with spending during the festive season.”

Tighten your budget

Set yourself on the road to recovery with a few belt-tightening measures. Mrin Agarwal, founder-director, Finsafe says, “Go on a financial detox entailing no lifestyle spending for the next few weeks.” For some this could take a few months. Curb the urge to spend with a few simple steps like putting your credit card away from easy reach and deleting the cards saved on shopping sites.

Sanjeev Govila, a Securities and Exchange Board of India (Sebi)-registered investment advisor (RIA) and CEO, Hum Fauji Initiatives, a financial planning firm, says, “Cut out non-essential spending like eating out, fancy purchases, leisure travel, etc.”

Ask for grace period

Don’t be afraid to ask your credit card company or other lenders for a grace period. Govila says, “Some may give you more time to pay off your debt before they begin charging interest. Some may offer a lower interest rate.”

Some loan accounts may prove inflexible while others may offer some wiggle room. “Pay off the inflexible ones first,” adds Govila.

Focus on credit card debt

Prioritise repayment of credit card debt as it is the most expensive with interest rates ranging between 36 and 42 per cent. Shetty says, “Check if you can get your credit card debt converted into EMIs.” Credit card EMIs have a lower rate of interest between 15 and 20 per cent. Also monetise your reward points and claim cashback.

Dhawan says, “See if you can access cheaper debt like a personal loan or a loan against an insurance policy.” Agarwal suggests taking a loan against an asset like gold or fixed deposits (FDs).   

If you have investments like equity mutual funds, check how much you are earning on them and compare with the interest you are paying on your debt. If the rate of return is lower, liquidate some of these investments.

Don’t treat BNPL debt lightly 

When you purchase an item on BNPL, it takes away the burden of paying a lump sum. The entire amount gets divided into EMIs. However, a BNPL credit facility used without caution can lead to a debt trap. While no interest is charged in the initial days, the annual interest rate levied later could go up to 36 per cent if this credit facility is used for a longer period, say, between two months and two years.

Avoid using this instrument for longer-term credit. Look for cheaper alternatives to pay off this debt if you need more time than initially anticipated. 

Pay no-cost EMIs on time

No-cost EMIs are essentially interest subvention schemes between merchants and lenders. The interest cost is not waived. Instead of the customer, the manufacturer and the merchant bear the interest cost.

Remember that you forgo certain discounts which you would have got if you had made an upfront payment. Sometimes, the interest cost is added to the product price and then the higher price is converted into EMIs.

If you have made a big-ticket purchase on no-cost EMI without having to pay a higher price or additional fees, this could be a good option. However, pay your EMIs on time to avoid penal charges.

Avoid dipping into investments  

Investors pulled out Rs 6,578 crore from their systematic investment plan (SIP) accounts in September, the highest in 11 months, according to the Association of Mutual Funds in India (Amfi) data. While some of this money went into making the down payment on a house, a good part went into pre-festival spending.

Dhawan says, “Avoid breaking an SIP to do Diwali shopping if it was for a long-term goal like retirement, child’s education, etc.”

If you have done so, make amends. Dhawan says, “Once you have paid off your debts, consider increasing your SIPs to make up for the deficit.” 

Start planning ahead

Festive overspending can lower your capacity to achieve your short- and mid-term financial goals, so don’t fall into the same trap next year. Govila says, “Once you’ve paid off this year’s debt, or as soon as you have the resources, start saving a portion of your monthly income in an account reserved for the next festive season. Calculate what you expect to spend next year using this year’s total and start saving for that goal.”

Select debt repayment strategy that suits you

Debt snowball

• Here, you pay off your debt in the order of smallest to largest balance, irrespective of interest rate
• Make the minimum payment on all your loans, then use surplus to pay off smallest debt
• When that is paid, move to the next smallest, and so on
• This method will boost confidence and help you stay on course
• But it is more expensive; it may take you longer to pay off all your debts

Debt avalanche

• Rank your loans by interest rate — from the highest to the lowest
• Make minim um payments on all loans first to avoid a default, then use the surplus to pre-pay a part of your highest-cost debt
• Once it is paid off, move to the debt with the next highest rate, and so on
• This approach will save you more in interest cost and help pay off your dues faster