What are most people doing when they have saved money? People will give up something they want today in order to have a better tomorrow. Today, credit cards, loans, EMI schemes and loans are available at the click of a button. This allows people to fulfill their dreams as they happen.
People are comfortable taking out debt in order to fund their lifestyles because of the easy access to credit. Unfortunately, this comfort can lead to serious consequences. The debt trap is the most serious.
1. What is a debt trap and common causes of debt?
A debt trap is technically a situation in which the debt spirals out of control. This happens when you spend more money than you make. However, life happens. You may find yourself in debt for years because of unplanned events or poor planning.
Let’s look at the causes of debt. This will allow you to make better financial decisions and help you avoid debt.
- Loss of income or low income
- Education costs
- Unexpected emergency
- Extravagant lifestyle
- Bad budgeting
- Reliance on credit cards
- Little or no savings
- Spending future money
2. How To Avoid A Debt Trap And Tips Payoff Debt
The right financial planning and management are essential to avoid falling into a debt trap. These six tips can help you avoid falling into debt traps.
Identify The Problem
Analyze the current situation and identify areas of concern. You can create a plan to address those areas. Your solution to debt problems could be found in a thorough and detailed review of your current financial situation.
Prioritize Your Needs
After an in-depth analysis:
□ Divide your expenses into essentials, semi-essentials and non-essentials.
□ These expenses can be divided based on priority. For example, rent, insurance and your NYSEG utility bills should be ranked first.
□ To avoid buying semi- and non-essential goods, make lifestyle or behavioral changes.
Consider Debt Consolidation
Consolidating your debt allows you to use one loan to payoff all of your loans. Consolidating your debt means that you only have to repay one loan and not multiple loans at different rates of interest.
Use Your Investments To Repay Debt
You could reduce your debt obligations if you have invested in high-return schemes like equity, bank deposits, mutual funds, Chit Funds, and other investments. After you have paid off a significant amount of debt you can start rebuilding your wealth.
Stop Taking On More Debt
To payoff existing debts, you will incur more financial obligations. This can lead to financial and mental stress. Avoid them.
Create An Emergency Fund
A separate fund is essential to cover financial emergencies. An emergency fund should be at least 3 to 6 monthly living expenses. This fund will help you get through difficult times without relying on a loan.
This money can be invested in many investment options in New York that guarantee high liquidity. A bank savings account can be a great place to store your emergency funds. However, it won’t provide you with good returns. A chit fund is a good option to store your emergency funds. It provides liquidity and offers better returns.
Save On Groceries To Help Pay Off Debt Faster
You can save money on groceries to help you pay down debt faster. Another option is to stock up when they’re on sale. Stockpile non-perishable grocery items such as cereals, canned goods, and food that you can freeze, like bread or meat. Stockpiling groceries on sale can help you save up to 25% each year on your grocery bill. If a family of four does this, they could save between $2,300-$2,900 per year. Saving these types of money on your debts will make you a lot more successful in the long term.
Get A Second Hustle
Many people find a way to reduce their debt by getting a second job or working an extra shift. Although this strategy won’t work for everyone in New York and it may take a few years to become debt-free, but it is possible. This strategy must be applied to all your income for debt repayment. You don’t have to work extra hours or shifts. After your debts have been paid off, you can start scaling back.
Refinance Your Mortgage
You maybe able to consolidate your debts if you own your home. Additional mortgage insurance may prove costly if you don’t have a lot of equity. Consider all options and get advice from an outside source (as lenders have a vested incentive to make you choose this option). Don’t rush to find the first home equity financing company that will give you the money if a bank or credit union can’t help you. Instead, speak with a non-profit Credit Counselor first. There maybe other options than refinancing the home. They will help you evaluate all options and devise the best plan to move forward and achieve your financial goals.
Avoid Credit cards
Credit cards can be a double-edged weapon. Credit cards are a double-edged sword. They can be extremely helpful when you have cash in your pocket, but they can also make your financial situation worse if you don’t manage your finances well.
A healthy financial management system can help you avoid debt traps and achieve financial freedom. To avoid high-interest rates and debt traps, make sure you repay any credit or loan that you use to purchase things or to meet pressing financial goals.