Divide your expenses into ‘necessary’, ‘important’ and ‘entertainment’. Cut down from the third list and use this money to start repaying your debts
25 Nov, 2013, 08.00AM IST | Economic Times
Here are the 10 traits or habits that will tell you if you are prone to falling in a debt trap and the various means you can employ to get out of it at the earliest..
1. Unclear about finances
You have no idea about your account balances, monthly expenses, loan interest rates, fees, fines, or other contractual obligations.
2. Poor saving habits
You don’t plan for taxes, retirement or other predictable items and are surprised when they are due. You live for today, don’t worry about tomorrow.
3. Shopping till you drop
You find ‘good deals’ irresistible, make impulsive buys, leave price tags on clothes so they can be returned.
4. Buying on credit is different
Swiping a card feels better than using cash. It’s a feeling of belonging to the club, of being accepted, of being grown up.
5. Juggling financial crises
You are wont to grappling constantly with crises, such as using one credit card to pay another, dealing with bounced cheques, etc.
6. Living on the edge
You live from paycheque to paycheque, take risks with health and car insurance coverage; write cheques hoping the money will cover them.
7. Don’t like discussing money
You are inordinately inhibited and embarrassed in what should be a normal discussion of money.
8. Overworking or under-earning
You work extra hours to earn money to pay creditors, use time inefficiently, take jobs below your skill and education levels.
9. Reluctant to value yourself
You like to live in selfimposed deprivation and deny basic needs in order to pay your creditors.
10. Hoping someone will save you
You keep hoping someone will take care of you, if necessary, so that you won’t really get into serious financial trouble, that there will always be someone you can turn to.
Can you manage your debt?
The debt servicing ratio measures a borrower’s ability to repay his loans. Find out if you are in a position to do so by using this formula.
Debt servicing ratio = Monthly loan repayments / Monthly net income
The lower the figure, the better it is. If the figure is higher than 0.5, you could be headed for a debt trap.
How to get out of a debt trap
Find out how much you owe, for what, and where you spend the most. Go through the past bills, bank and credit card state ments, and other loans.
Cut down spending
Divide your expenses into ‘necessary’, ‘important’ and ‘entertainment’. Cut down from the third list and use this money to start repaying your debts.
Pay costliest loan first
Repay the most expensive loan first and then focus on cheaper ones. Typically, the credit card rollovers are the costliest, followed by personal loans.
Take cheaper loans against securities, insurance policies, saving schemes, gold or fixed deposits to repay the more costly loans.
Get the loan restructured
If the loan EMI is too big for you to manage, approach your lender to have it restructured in a way that makes it easy for you to repay.
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