When people save money, what do they usually do? Because of a better lifestyle tomorrow, they sacrifice what they want today. People can now fulfil their wishes as they arise with the help of credit cards, monthly instalments and loans.
To meet their needs, people now are comfortable being in debt. It's possible, however, that this level of ease can cause things to spiral out of control, resulting in unintended consequences.
What is a debt trap?
The term debt trap refers to a situation in which one's debt grows uncontrollably. When you spend more than you earn, you find yourself in this position. It's a fact of life that things happen. If you're not careful, you could end up with a mountain of debt that takes years to pay off.
How to avoid a debt trap?
Identify the issue
Analysis of current situation and identification of areas of concern. Set up a plan to deal with the areas that you have control over. You may be able to solve your debt difficulties by conducting a thorough, in-depth analysis of your current financial circumstances.
Prioritise your needs
In the wake of a thorough investigation
- Then, you can categorise your spending into three categories: necessary, semi-essential, and optional.
- Prioritise these costs.
- Spend less on semi-essential and non-essential products by changing your behaviour or lifestyle.
Consider debt consolidation
If you want to consolidate your debt, you can take out a single loan to pay off all of your other obligations at once. You'll only have to worry about repaying one loan instead of multiple loans with varied interest rates and due dates.
To pay off debt, leverage your investments
It's possible to lower your debt commitments if you've invested in high-yielding schemes such as mutual funds or bank deposits. Following a significant amount of debt repayment, you can begin to recover your fortune.
Stop taking on more debt
In addition to increasing your financial commitments, taking out extra loans to pay off your existing debt increases your financial and emotional stress levels. So, stay away from them at all costs.
Put money aside for unforeseen circumstances
It's crucial to maintain a separate emergency fund that's exclusively used to deal with unforeseen financial situations that may arise. For optimal results, an emergency fund should have at least three to six months' worth of living costs. Without the need for a loan, this fund helps you get through bad times.
This money can be parked in a variety of investment vehicles that guarantee high liquidity. Although a bank savings account is a useful way to save emergency funds, it doesn't offer much in the way of interest rates or dividends. Consider putting your emergency cash in a chit fund, which guarantees immediate liquidity and higher returns on your money, as an alternative.
Controlling your finances well might help you avoid debt traps and achieve financial independence. To avoid exorbitant interest rates and debt traps, make sure you pay back your loans and credit cards on schedule.