Balancing Debt Repayment and Smart Investing

Understanding Your Debt Burden

The average Indian household carries approximately ₹2.6 lakh in debt, according to recent RBI data. For many, this debt accumulation happens gradually—a personal loan here, a credit card balance there—until it becomes overwhelming. Creating an effective debt repayment strategy is essential, especially when you’re trying to balance debt payments with investments for your future.

The first step in any debt repayment strategy is getting a clear picture of what you owe. Make a comprehensive list of all your debts, including:

• Outstanding amount for each debt
• Interest rate charged
• Minimum monthly payment
• Loan tenure remaining
• Any prepayment penalties

Calculating Your Total Debt Burden

To understand your debt burden, calculate your debt-to-income ratio:

Debt-to-Income Ratio = (Total Monthly Debt Payments ÷ Monthly Income) × 100

For example, if your monthly income is ₹60,000 and your total monthly debt payments are ₹24,000:

Debt-to-Income Ratio = (24,000 ÷ 60,000) × 100 = 40%

Financial experts recommend keeping this ratio below 40%. If yours is higher, you should prioritise debt repayment over aggressive investing.

Prioritising Your Debts Effectively

Not all debts are created equal. High-interest debts like credit cards and personal loans can significantly hinder your financial progress due to compounding interest. An effective strategy focuses on tackling these expensive debts first.

There are two popular methods for debt prioritisation:

• Debt Avalanche Method: Focus on paying off debts with the highest interest rates first while making minimum payments on other debts. This approach saves you the most money in interest payments.
• Debt Snowball Method: Pay off your smallest debts first, regardless of interest rate, to build momentum and motivation. This psychological approach helps many people stay committed to their debt repayment strategy.

Comparing Debt Repayment Methods

Let’s compare different debt repayment methods.

For Rahul, a small business owner from Jaipur, the snowball method worked best: “Paying off my smallest loan within three months gave me the confidence to tackle my larger debts. The psychological boost was worth the extra interest.”

Balancing Debt Repayment With Investments

While aggressive debt repayment is important, completely stopping investments can harm your long-term financial health. The key is finding the right balance based on interest rates and investment returns.

For instance:

• Credit Card Debt (36-42% Interest): Prioritise repayment over investing
• Personal Loan (10-18% Interest): Strong focus on repayment with some investing
• Home Loan (7-9% Interest): Balance between repayment and investing
• Education Loan (8-10% Interest): Balance between repayment and investing

Smart Investment Allocation While Paying Debt

Even when focusing on debt repayment, consider these investment priorities:

• Emergency Fund: Maintain 3-6 months of expenses in a high-yield savings account or fixed deposit for financial security
• Employer Matching Contributions: Contribute enough to receive full employer matching in retirement accounts
• Tax-Advantaged Investments: Utilise tax-saving investments under Section 80C
• Long-Term Growth Investments: Allocate a smaller portion to equity investments for long-term growth

Using Personal Loans for Debt Consolidation

Sometimes the best repayment strategy involves consolidating multiple high-interest debts into a single, lower-interest personal loan. This approach simplifies payments and can significantly reduce interest costs.

Let’s look at a practical example. Priya has the following debts:

• Credit Card A: ₹1.2 lakh at 40% annual interest, minimum payment ₹6,000/month
• Credit Card B: ₹80,000 at 36% annual interest, minimum payment ₹4,000/month
• Personal Loan: ₹1 lakh at 16% annual interest, EMI ₹10,000/month

By taking a personal loan to pay off debt at 12% interest for ₹3 lakh, she can consolidate all these debts into a single EMI of approximately ₹10,620 for 36 months, saving nearly ₹1.5 lakh in interest over the loan term.

Check Your Eligibility for Debt Consolidation

Before applying for a personal loan for debt consolidation, check your credit score to understand your eligibility. Most lenders require a minimum score of 700-750 for competitive interest rates. You can easily check your credit score through the Airtel Thanks App and review the eligibility criteria for personal loans.

Creating Your Personal Debt-Investment Plan

Now that you understand the principles, it’s time to create your personalised debt repayment strategy alongside investments. Follow these steps:

• Calculate your discretionary income (income after essential expenses)
• Allocate a percentage to debt repayment (60-80% if high-interest debt, 50% if moderate interest)
• Allocate the remainder to investments (prioritising emergency fund, then tax-advantaged options)
• Review and adjust quarterly based on progress and changed circumstances

Sample Allocation for ₹30,000 Monthly Discretionary Income

For someone with high-interest credit card debt and a home loan:

• ₹18,000 (60%) toward credit card debt (debt avalanche method)
• ₹6,000 (20%) toward home loan (regular EMI payment)
• ₹3,000 (10%) toward emergency fund in a fixed deposit
• ₹3,000 (10%) toward tax-saving investments

Once the credit card debt is eliminated, the allocation can shift to increase investments while maintaining regular home loan payments.

Leveraging Financial Tools for Debt Management

Modern financial tools can significantly improve your strategy. Consider utilising:

• Automatic payment systems to ensure timely payments and avoid late fees
• Roundup savings apps that invest spare change while you focus on debt
• Debt payoff calculators to visualise different repayment strategies
• Budgeting apps that help identify areas to cut expenses and accelerate debt repayment

For additional financial flexibility during your debt repayment journey, consider options like a gold loan using your idle gold assets or a credit card with cashback benefits that can be applied toward debt payments.

FAQs

1. Should I completely stop investing until my debt is paid off?

Generally, no. While focusing on high-interest debt repayment, maintain some investing—particularly for retirement and emergency funds—to avoid falling behind on long-term financial goals.

2. How can I accelerate my debt repayment strategy?

Find additional income sources through side hustles, sell unused items, reduce discretionary spending, and consider negotiating with creditors for lower interest rates.

3. Is debt consolidation always a good strategy?

Not always. It works best when you secure a significantly lower interest rate and commit to not accumulating new debt while repaying the consolidated loan.

4. Should I use my emergency fund to pay off debt?

Maintain at least a small emergency fund (₹25,000-50,000) even while aggressively paying debt to avoid taking on new high-interest debt for emergencies.

5. How do I stay motivated during a long debt repayment journey?

Celebrate small milestones, track your progress visually, find an accountability partner, and remind yourself of your financial goals beyond debt freedom.