This post might not be applicable for everyone, as each one of us are at a different stage, both financially and family wise. This post might be more relevant for the ones who might not be that well placed, but no one know when one lands up in such a situation (hopefully doesn’t happens).
How do you know if you are in a bad/good/great financial shape?
Do you end-up taking a small teeny tiny loan at the end of the month to just get over the hump?
Before spending an occasional big ticket (say your monthly in-hand), you think about how you would pay the bill, or end-up applying for a personal loan?
Do you pay your credit card bill, by either taking a loan or through another credit card?
Are you worried that if you get laid-off tomorrow, how would you survive for the next 3-4 months?
If answer to all of the questions is a NO, then you are in a decent position, financially; however if the answer to any of the above questions is a YES, then you might need to reconsider your spending choices as you might be prone into getting into a debt trap.
What is a debt trap?
It’s a situation where one ends up taking loans to pay their existing loans; and the situation just keeping worse and one accidental/one-off expense, and you get more and more deeper into the trap.
To avoid, getting into a Debt Trap, what are the few things that one can do?
Setup an emergency corpus: Keep about SIX months of expense equivalent money in a liquid fund. Preferably not a bank account, coz they then the money is there for you, but not visible. Don’t chase returns on this balance by putting it into a debt fund or equity fund or shares.
Keep a decent bank balance: This may be say 1 month of salary (put it in a sweeping-FD to get yields if you want). This money is the balance that you keep to avoid dipping into the emergency corpus you created.
Don’t put money required in the next 1-2 years in an equity fund: Markets are volatile, you don’t want the markets crashing on you, when you are about to redeem the money to fund that expense and then end-up taking a loan for it. Put that money into a debt fund (my personal recommendation, put it in a GILT/PSU bond fund, they don’t suffer credit risk, though they give 1-2% lesser returns, return of principal is more important than return on principal).
Getting out of a debt trap
I understand and agree to the point that it’s easy to say that one should not spend beyond one’s means and should save more, invest more so that we are financially secured, but it’s not easy, one size doesn’t fits all, and everyone has a different reason why they fell off the wagon (some had a family emergency, some don’t earn enough, or just that we are in an expensive city without that great a salary).
If you are likely to get into a debt-trap then what to do?
Before you think that this is going to be a long boring lecture on how one should not enjoy that Starbucks coffee, or that you should have bought Royal Enfield stock and not its bike, don’t worry. I will give you FIVE pointers to start solving your debt situation.
Figure the depth of the trap: List down all the loans (include Credit Card spends converted into EMIs), and see which all can be pre-paid. If possible, pay off your loans in the following order:
Credit Card Dues - Pay the whole amount, not the minimum amount
Credit Card loans, which were used to pay other credit card loans
Buy Now Pay Later (Simpl, Lazypay types)
Personal Loans
If stuck between which loan to pay, pay the one which has the higher interest rate, even if the amount is small.
If you don’t have enough cash, then go to a BANK (not NBFCs) and take out a personal loan which pays off all the above loans. This is also known as debt consolidation.
Swallow your ego: While there is no pride being caught in a debt trap, but the more you hide the worse it becomes. If possible, ask your family members or friends, for some monetary help, people/friends are more understanding than you might think. Take about two months cash requirement and pay it over time. Why family member or friends?, coz they don’t charge interest and fees. This two month of funds will provide you breathing space to get your house in order.
Once the above two are done, then figure out your expenses. I am not asking you to install an expense tracker and capture each and every transaction. Just look at your bank balance from the day you get your salary to the next month. Subtract any SIPs/investments, and what you get are your expenses. A good way to avoid falling into a debt trap is to limit these expenses to 40% of your salary.
Reduce expense on luxuries: This doesn’t means that you stop going out, or have coffee etc. what’s life if not to enjoy. But what I meant is to reduce these outgoing expenses which happen multiple times a week. All expenses are justified till they are not OR in other words, all expenses are justified till you have the bank balance to support it. Few areas to observe your spending areas is look how much Swiggy ordering, hotel dining, cab rides, online ordering etc. OR big ticket monthly expenses like Rent, Electricity.
If more expenses are happening on the latter, then you might want to shift to a location closer to work where even a higher rent might set off the cab fare; or vice-versa.
If expenses are more on the consumption, then just reduce the frequency by say once a week at a time (this is very personal to the case in point, therefore general gyaan wont suffice, therefore stopping it)If neither 1 or 4 are the reason, then you need to look at your salary deductions (e.g. look at PF, reduce it from 12% of Basic to 1200) or else you need to find a higher paying job.
If you are in a debt trap situation, or need help in sorting out your financial situation, drop a mail to me at gupta.divyansh@gmail.com, or just ping on the chat functionality on the Substack website. I will try my best to help figure out a solution for you, free of charge.
Also one should remember there no way of making money in short term. I seen many people taking loan trading and caught up in loss. Wanted check if you can post on Bit-coin and Crypto currency!