How to avoid debt trap?
A debt trap is something like a chakravyuh, wherein it is easy to enter but difficult to get out. There are various reasons for this. Attractive loans and credit card offers usually are a road towards debt trap and you should not fall prey to these stuffs. To avoid debt trap it is really important to have a holistic view of your personal finance and have a financial plan in place which would guide you in reaching your financial goals. Following are some of the ways in which you can avoid the debt trap.
1. Credit cards
Credit cards are something when used wisely can help you in emergencies. However, if you use it for each and everything that you buy then credit cards can prove to be the greatest contributor to the debt trap. Avoiding the use of a credit card is not a solution, but you can use it diligently. To avoid the debt trap, give up on all the credit cards and only keep at max two credit cards with you.
2. Too many loans
Having too much of anything proves to be bad. The same goes for loans as well. Too many loans have the potential to eat up even your basic necessities. This can indeed lead you towards a debt trap. Even you can think of paying off the unsecured loans like personal loan or credit card debt at first before paying off the secured loans like a home loan. Though secured loans are termed to be good debt, that doesn’t mean you should have too many of it. To avoid this debt trap you need to ensure that your EMI must not be more than 33 per cent of your income and in case of EMI on the first home, it should not exceed 50 per cent of your income.
3. Emergency fund
Neither one can predict the future nor its outcomes. It is important to be prepared for any uncertainties that may pose a risk to your overall personal finance. So, having an emergency fund in place can help you ride such uncertainties in a planned way. Having 6 to 9 months of your expenses as an emergency fund is sufficient. However, the number of months of expenses to be considered depends upon one’s occupation. This will help you to avoid debt trap in case you have a temporary job loss and EMI needs to be paid every month for which you may use all the savings that you have made. So, instead, it is better to have an emergency fund in place which would help your savings to grow even in such events.