How to stay away from the ‘Debt trap’?

A few years back, a person from our neighborhood following a simple living renovated his house with posh interiors, a new car purchase was followed, children started going to a better school.… in short, his lifestyle underwent a major transmission.

A single earning member working in a private sector in mid-level management did all this in a short span.. But though his lifestyle was changed for a better, he slowly started keeping low.. changes in his behavior were open to everyone’s notice.

One day, when confronted, he slowly opened up & started talking about huge amount of loans he took & EMIs he is struggling to pay.

All this started when he changed his job! He got a company of colleagues who were believers of high lifestyle even though it is on the cost of their own financial wellbeing. A person who was once living modest & simple life, was impressed & convinced by them. In an attempt to ‘match their lifestyle’, he also applied for different loans, started using credit cards & came under the burden of ‘heavy debts’ to pay.

You must have seen similar stories happening within a family, neighborhood or within friend circle!

Many people fall in this trap & suffer… if we wish to stay away from this, we can follow & practice some simple things-

Stay away from ‘peer pressure’:

We are always surrounded by friends, colleagues, neighbors with whom we spend good times, learn many things from.

Though we have good relations with everyone, we all come from different backgrounds, incomes & thought process about money.

It always good to learn good things from them but we should never try to match with anyone lifestyle.

We may never know how they have built their empire castle! If we have people around us who try to influence us about high lifestyle, ease of getting loans & their advantages, then better to stay away.

‘Eligibility’ is different from ‘affordability’ to get additional loans:

If we have good & stable income, good credit score then we can be ‘eligible’ to get loans. but, it may not prove ‘affordable’ to us if our cash outflows have things like children education expenses, medical expenses of dependent parents, EMIs of already taken loans if any, etc

If we have any such mandatory expenses then they will reduce our ‘affordability’ to take loans. Even if ‘credit cards’ help us pay for the things we wish to buy immediately, such ‘easy loans’ may not provide ‘affordable’.

If you are considering additional loans to buy anything, then please look at our cash flows & how can we afford it.

Don’t take loan to save on taxes:

A person once asked me, “Should I buy a house via applying for a housing loan so that I can get eligible tax benefit every year?”

It’s true that, housing loans, education loans do give us tax benefits, But, many other things like affordability, real need to take such loans should be checked beforehand.

Learn to feel ‘content’:

This is one feeling which is ‘missing’ in our behavior & thoughts these days. Our parents & grand parents were always satisfied & content with what they have had. They never tried to impress others nor did they attempt to buy beyond their financial capacity.

We live in a heterogenic society in terms of income & lifestyle. More we think of buying big & different things, change our lifestyle often, we will automatically tend to spend more.

In addition to this, we often feel ‘restless’ & ‘lesser than others.’   This cause major effects on our mindset & mental health. To be at peace mentally, feeling content is important.

Keep an a/c of your cashflows-

Many of us observe that, though we draw good income, at the end of the month, we are left penniless! How & where do we spend our hard-earned money, needs an accounting.

I always watch my father keep an a/c of our monthly household expenses daily in his diary.

Due to our busy routine, it may not be possible for us to write them down every day, but at-least we can follow this as a ‘weekend routine’.

It helps us in ‘budgeting’ & we can take money decisions more wisely.

Make your ‘contingency fund’ ready:

We all are prone to face ‘emergency situation’ anytime in life. Be it accident, loss of job or death of earning member of the family.

Such incidences left us mentally disturbed & when in addition to this, we have financial responsibilities to cater to, then ‘contingency fund’ comes to our rescue.

Its important to have a contingency fund equivalent to 1 year of our monthly household expenses. Such expenses should include children school / education expenses, bills like electricity bills to pay, loan EMIs, grocery expenses, medical expenses, etc.

We should count them & 12 times of such expenses must be our ‘contingency fund’.

We should keep at elast 3 months of our monthly expenses, in one dedicated savings a/c. Remaining corpus can be invested in short term FDs / debt liquid funds.

Please note that, this corpus must be used in case of emergency only. We must not expect ‘high returns’ from this kind of fund.

Though it involves calculations & finance, our thought process & mindset about ‘personal finance’ has great impact on our ‘debt management’.

Its better to take mindful decisions while applying for any debt.

I always say…  ‘debt management starts with one simple question to self, “Do I really ‘need’ to buy this”?