Money is now available at the press of a button, thanks to credit cards, EMI programmes, and loans, giving people the freedom to fulfil their wishes as and when they arise.
People are very comfortable with the idea of taking on debt to suit their lifestyle expectations because credit is so easily available. However, this comfort can occasionally cause things to spiral out of control, with disastrous repercussions. The debt trap is the most serious.
A debt trap occurs when the amount of debt you owe becomes out of control. This happens when you spend more than you make. However, life happens. Unexpected occurrences, a decision to seek an education, or poor preparation might lead to you incurring debt that will take years to repay.
Causes of debt
Let’s look at some of the major sources of debt. This will assist you in making better financial decisions and staying out of debt.
- Income loss or low income
- Education expenses
- Unforeseen emergency
- Extravagant way of life
- Poor budgeting
- Reliant on credit cards
- Savings are little or non-existent.
- Investing in the future
Avoiding Debt Trap
Avoiding the debt trap necessitates proper financial planning and management. Here are six strategies for avoiding debt traps:
Determine the problem
Analyze your current circumstances and discover the areas of worry. Make a plan to address the areas under your control. A thorough examination of your existing position could be the solution to your debt difficulties.
Set your priorities.
Following a thorough examination:
- Divide your spending into three categories: necessary, semi-essential, and non-essential.
- Priority should be given to these charges.
- Change your behaviour or lifestyle to avoid spending on semi- and non-essential products.
Think about debt consolidation.
Debt consolidation allows you to take out a single loan to pay off all of your existing loans. When you consolidate your debt, you only have to worry about repaying one loan rather than servicing multiple loans with varied interest rates and due dates.
Use your investments to pay off debt.
If you’ve put money into high-yielding investments like mutual funds, bank deposits, chit funds, or stocks, you could utilise it to pay down debt. Once you’ve paid off a significant amount of debt, you may focus on rebuilding your wealth.
Stop taking on new debt.
Taking out more loans to pay off existing debt raises your financial commitments while also adding financial and mental stress. As a result, avoid them entirely.
Create an emergency fund.
It is critical to establish a separate fund for dealing with financial emergencies. An emergency fund should ideally be at least three to six months’ worth of living expenditures. This fund allows you to get through difficult times without having to take out a loan.
You can put this money in a variety of investment vehicles that provide high liquidity. While a bank savings account is a decent place to hold your emergency funds, it does not provide good returns. Consider putting your emergency savings in a chit fund, which guarantees immediate liquidity and higher returns.