How to avoid getting into debt-trap? 3 things you can do
New Delhi: Being debt-free is one of the nicest things as far as financial health is concerned. Though, there are certain habits and decisions which leads an individual towards debt-trap. In debt-trap, a person gets stuck in a situation in which the total borrowings are way higher than the total savings. A large section of people is forced to announce their bankruptcy as they are not able to get out of the debt-trap or multiple debt obligations. There should be a definitive mix of credit and cash so that an individual can optimise the spending with the help of debt and cash.
The credit cards, loans and other credit facilities should be utilised constructively and serviced religiously on or before the repayment due dates. Higher financial independence leads to better decision-making and helps in maintaining a good credit profile. A person with a decent credit profile and repayment history can avail timely credit facilities as and when there is a requirement.
3 things to do to avoid getting into debt-trap
Evaluate and differentiate the expenses
In order to avoid yourself falling into a debt-trap, a person should evaluate his/her spending behaviour, at various junctures of time, i.e., the beginning of the month, month-end period, credit utilisation, big-ticket purchases, and other purchases made on borrowed money. The expenses should be segregated into revenue generating and non-revenue generating. Revenue generating expenses can be buying a real estate unit on borrowed money, while, non-revenue generating expenses would be buying a vehicle on borrowed money.
An individual should look into the high-cost heads, the things on which he or she is overspending regularly. Debt-trap can be avoided by collaborative efforts which include servicing EMIs on time, reducing unnecessary expenses, increasing income and income sources, etc. Sometimes, a person keeps on spending extra money on a thing which can be done without incurring that extra cost. A periodic review of expenses and big-ticket purchases can help in downsizing and eliminating unnecessary expenses.
The requirements should be prioritised accordingly to the time and their urgency. People should always look for relatively easy and affordable substitutes with which the overall expenses can be contained within the limit. Pre-planning the requirements helps in estimating the forthcoming expenses which help in reducing unnecessary costs at the last moment. The requirements should be categorised as per the priority. For instance, if you are already in a debt-trap or in immense debt burden, eliminating unimportant things from the to-do list, and reducing the fixed monthly expenses helps in cutting down on non-essential expenses and big-ticket purchases.
Build emergency fund
Building an emergency fund is always advised. An emergency fund helps you to sustain in partial unemployment period, debt-trap like situation, medical emergencies, etc. You can also start contributing a proportionate amount of money while you are already fighting it out to get out of the debt-trap. Small savings over a period of time along with the interest income can help you in building a sizeable corpus in a long period of 3 to 5 years. A person can consider investing in term deposits of banks or post offices, low-risk mutual fund schemes, gold, and other government-backed savings scheme which are liquid in nature.