Get Out of the Debt Trap!
The ongoing pandemic has had a devastating impact on the personal finances of many individuals. This is evident from the data published by the Reserve Bank of India which shows that the household debt to GDP ratio increased to 37.1 per cent in the second quarter of 2020 from 35.4 per cent in the first quarter. The overall debt held by Indian households was roughly valued at Rs43.5 lakh crore as of March 2021. The pandemic has only accelerated the process of debt creation at the hands of retail investors.
In the last five years, the income of an individual has increased by compound annual growth rate (CAGR) of 4.3 per cent as against 17.7 per cent CAGR growth in borrowing. With average inflation above 4 per cent, individuals have resorted to borrowings to maintain their consumption level. If this is not controlled at the right level, one may get into a debt trap. If you, like many others, been conditioned by well-intentioned parents and financial experts to get out of debt then, yes, being debt-free is the right way. Nevertheless, not all debt is created equal. There is bad debt and there is good debt.
You create bad debt by borrowing to buy something that you couldn’t otherwise afford such as a foreign vacation or a fancy motorcycle. But there is also good debt. These are monies that you borrow to make an investment that produces cash higher than its instalment. Good debt can also be used to leverage your position to buy assets that appreciates such as a housing loan. It may help you to earn rent as well as build wealth in the long term. Our cover story gives you a glimpse of what is a good and bad debt and a fail-proof strategy on how to get out of bad debt.
SHASHIKANT