“Interest on debts grow without rain.”
Feeling leads to thinking, thinking leads to actions and when actions are repeated several times it become habits. Same is the origin of debt trap where feelings and thinking have multiple reasons to originate right from socio-economic requirement of education, health, shelter etc. or materialistic requirement of being elite, eating expensively out, glossy lifestyle etc. And when times are bad it can lead to the action of non-payment and when these actions are repeated over time unintentionally defaulting becomes our habit and without realizing we get struck in the vicious cycle of debt trap.
Even though most of us understand all these things subconsciously still major of us face debt burden at some point in our life. And it is interesting to observe that many individuals are able to fight back and get back on the financial stability path but at the same time many will succumb under it because of lack of understanding of personal finance and budgeting and as a result go bankrupt. Hence, in this article we will try to understand the right measure we should take to end up in the side of the former.
Most people have the habit of receiving an income, followed by paying for expenses and debt as and when they are asked for hence leading to lack of awareness about how their money is flowing. Hence, first and foremost step to get out of debt trap is to knowing exactly how much income you are generating, when it will be credited, and how much you owe to different parties. All these things will help you to draft a proper budget plan to tackle the situation. Word of caution, if you are not following this step forget about getting out of the trap on contrary, we preparing the dish for further financial disaster.
Plan down the repayment of loan based on their cost (Rate of Interest). The higher the interest the higher the priority should be the simple outlook. This may include prioritizing the unsecured loans like credit card bills or pay day loans first and keeping long term and tax benefiting loans like education loan and home loan second in line. To inflict damage control, avoid new debts try to control your expenses with prudence.
Additional Reading: Debt Trap
A new loan to repay the high interest loan will harvest new interest burden on you, hence if possible, borrowing from friends or family should be your first consideration. It allows you to get the debt at no or low interest and gives you flexible timeline to repay the loan when the situation is better on your side. But keep in mind to use the borrowed money judiciously just to clear your debts not for your personal expenses and set a proper repayment plan for this.
If still situation is not in control you may consider liquidating assets like mutual funds or fixed deposits which offers return which is less than the interest you are paying on your debt and use it to pay off your loan first. It makes no financial sense to earn less but pay more. Once the situation is all good for you, building a new investment portfolio again will not be a problem. At the same time if you have some idle depreciating asset like an old car you may consider selling it and reduce your debt.
If multiple debt obligation exists than you may consider talking to your bank regarding consolidating all these loans into one with restructured interest and timeline accordingly. Even increasing the tenure of your current loans to smoothen the magnitude of EMI’s can help you.
I know it sounds sermonic when someone advice to control your expenses, spend less and save more etc. But there is a deep truth that however boring you feel about all these talks, these are still the deep values you should inculcate whether you are under debt trap or not. Every time before you want to spend on eating out, holidays or other self-indulgent activities just ask one question to yourself, “Whether we can afford it?” And you brain will tell you the write answer. Have a proper monthly budget for yourself and avoid buying depreciating assets.
“We must accept finite disappointment, but we must never lose infinite hope.”
– Martin Luther King
I know being in debt trap can be daunting and it may appear like we can never come out of it. But actually, it is a test of our character more than a problem. If we keep ourselves calm think about the important people in our life, we can solve any problem not just the debt trap. So, don’t let this temporary hardship to affect you professional and personal life and try to follow the right path that we have discussed above and before you know it you will be out of this victorious.
About the Author
Rishabh Tripathi is a management intern at MudraHome.com. He is a second year MBA student in IIT-Kanpur. A writer by day and reader by night loves to spread awareness about personal finance and budgeting.