The increasing burden of day-to-day life has put a massive strain on people. Almost everything is just a click away. From clothes to electronic items, you can buy everything online. Hence, the rapid technological growth has led to overspending. The first step toward the debt trap is often overspending. Mindless spending on little things sums up to become huge expenses after one point in time. However, overspending is not the only reason for people to fall into the debt trap. Let us check out the truth about the debt trap, how people fall into it, and the measures we can take to stay clear.
First of all, let us look at why and how the Indian population falls into the debt trap.
Spending more than their means
We cannot deny the fact that our expenses increase as our income increases. But rather than managing and systematically utilizing our income, we start to overspend it on long-pending things we “needed.” The needs here are, in reality, the things we want. This habit of overspending is usually the beginning of the debt trap.
Fixed outgoing income more than 70%
Fixed outgoing income, Fixed Obligation to Income Ratio (FOIR), refers to the fixed expenditures you accumulate every month. It can include monthly utility bills, EMIs, subscriptions, kids’ school fees, daily expenses, and more. If your fixed payments are taking up 70% of your income, it is a stepping stone toward the debt trap. Ideally, FOIR should not be more than 50%.
More than 50% of income going to EMIs
We are in a fast-paced world, everything is just a click away, and it is challenging to suppress your desires. Buying that new phone has somehow become more important than saving for rainy days. Many people fall prey to “Easy EMI Options,” “discounts,” and “sale,” and end up making significant purchases. Essentially, one should save at least 30% of his/ her monthly income and put it into emergency funds. It is a red flag, and such people often end up falling into the debt trap.
Taking another loan to clear existing debt
It doesn’t take much for a loan to turn into debt. Debts have become easier than ever to get, but they are often hard to pay off. Eventually, many people end up taking another loan to pay off their debt. In the end, rather than getting out of the debt trap, they start to accumulate more interest on their existing loan. It is not a good idea to take another loan to clear the current debt.
Putting regular expenses on credit card
With digitalization and easy access to financial institutions, we have become dependent on credit cards. As our expenses increase, we put our daily expenditures on credit cards which is a bad idea. Overusing credit cards means buying everything with interest. Understandably, keeping cash with you is not preferred by people, and it is easier to buy things using cards. But rather than using credit cards for small purchases, it is advisable to use debit cards or UPI for regular purchases.
Piling up bills
No matter which bill you are considering, piling up utility bills, credit card bills, or for that matter, any bills is not a good idea. As your bills start to accumulate, it becomes troublesome to pay them off—more than that; they add up to your stress with late fees and more. Instead of piling them up, keep your bills streamlined and pay them on time.
Non-payment of ongoing loans
Even though it is easy to get loans, if you keep increasing the debt load on yourself, you are bound to end up falling behind on your regular payments. Non-repayment leads to extra interest or late fees, which adds to your burden. And the consequences are not limited to late fees or interest charges, but it also includes a drop in your credit score and makes you unfit for future loans.
Loans with a variable interest rate
The interest rate on credit cards is something we initially do not notice. Many people take credit cards on offers with zero interest rates or zero annual fees, but after a few months, when the offer ends, and the interest rate starts to pile up, it starts to cost them more than their initial expectations. Later on, when they cannot make their regular credit card payments, they begin to pay the minimum amount due, leading to a debt trap in the future.
Borrowing based on future income
Many of us rely on the fact that we will get paid next month. It is one of the most irresponsible things to do. Having the “I will get paid next month” attitude often lands you into a debt trap. Whether you borrow from friends or a banking or non-banking institution, you are bound to fall into the debt trap. Keep a close eye on borrowing!
Now that you understand why and how people fall into the debt trap let us know how you can steer from a debt trap.
Determine and analyse the problems
Generally, problems are not limited to one; multiple small issues cumulate and become one colossal debt. We have discussed them above. So, sit back, analyze and find out the ways to solve those problems.
Budget and choose needs over wants
Needs over Wants! We cannot stress it enough. The point is, as human beings, we tend to keep our wants over our needs. We would rather spend our income freely than budget it. Budgeting takes us a long way. We not only save money, but it also makes us financially disciplined.
Avoid taking more debt
Debt accumulation doesn’t stop if you keep taking one loan after the other. The whole point is if you keep taking loans, it wouldn’t just put you at risk from taking future loans but also drag you to the brink of debt trap and bankruptcy.
Consider professional help
Debts can be hard to pay off due to various reasons. If you cannot pay your debts and your accounts are becoming delinquent in the process, you are already in the debt trap. One of the possible ways to get rid of debts is to take professional help. There are multiple financial management options available. One such option is debt settlement.
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