Are you falling into a debt trap?

Having a debt-free financial life is one of the most desired situations. However, due to a change in lifestyle and big dreams people usually take the aid of loans. Debt, nowadays has become part of our lives, thanks to the credit card. But this sounds to be the beginning of a new era for you. An era of the debt trap. A debt trap is a situation in which a debt is difficult or impossible to repay. So, how you can avoid getting into a debt trap? Let’s find out.

Spending behavior
This is one of the major things leading you towards a debt trap. What usually happens is due to the convenience of credit card people fall prey to unwanted purchases. People these days spend money that they have not earned to buy things they don’t need to impress people they don’t like. If you are spending on things which you actually don’t need then soon you may require to give up on things you need. So, it is very important for you to define your spending and divide it between needs and wants. Doing so will help you to spend less on things that you don’t need. Even having a budget in place can help you to control your splurging behavior. This will help you to avoid falling into a debt trap.

Keep debt at minimum levels
Keeping debt at minimum levels will eventually help you in limiting your debt exposure and high-interest payments. It is recommended to opt for debt only if you are buying your first car or first home or falling short to fund your child’s foreign education. But even for these, it is advisable to take minimum loan tenure possible. Promising yourself to reduce the use of credit card and use it only at the time of emergency will also help you in keeping your debt at minimum levels. Avoid funding your wants like a vacation or a car upgradation or home renovation through loans. Try to make it a financial goal and invest for the same. Restrict your EMI payments to 50 per cent of your income in case of home loan for the first house and 30 per cent of your income in case of other debts. Collectively loans must not form more than 50 per cent of your income.

Build emergency fund
This is one of the most important things which can help you to deal during your rainy days. No one wishes to have a job loss with debt in hand. However, if such a thing occurs at all, you must be prepared for the same. The emergency corpus would help you during such times to not only fulfil your needs but also help you to serve your debt. Having 3 to 6 months of your fixed expenses (incl. your EMIs) as an emergency corpus is desirable. However, it completely depends on the occupation you deal with. For instance, a government employee would need 6 months of expenses as an emergency fund. However, marketing personnel may require 12 months of expenses as an emergency corpus. Having an adequate emergency fund in place would help you to avoid falling into a debt trap.