When people save money, what do they usually do? Because of a better lifestyle tomorrow, they sacrifice what they want today. People can now fulfill their wishes as they come with the help of credit cards, monthly installments and loans.
To support themselves, people are now comfortable going into debt. It’s possible, however, that this level of ease could send things spiraling out of control, leading to unintended consequences.
What is a debt trap?
The term debt trap refers to a situation in which debt grows out of control. When you spend more than you earn, you find yourself in this position. It’s a fact of life that things happen. If you’re not careful, you could end up with a mountain of debt that will take years to pay off.
How to avoid the debt trap?
Identify the problem
Analysis of the current situation and identification of areas of concern. Make a plan to manage the areas over which you have control. You may be able to solve your debt problems by doing a thorough analysis of your current financial situation.
Prioritize your needs
After a thorough investigation
Next, you can categorize your expenses into three categories: necessary, semi-essential, and optional.
Prioritize these costs.
Spend less on semi-essential and non-essential items by changing your behavior or lifestyle.
Consider debt consolidation
If you want to consolidate your debts, you can take out a single loan to pay off all your other obligations at once. You will only have to worry about repaying one loan instead of multiple loans with varying interest rates and maturities.
To pay off your debts, take advantage of your investments
It is possible to reduce your debt commitments if you have invested in high yield schemes such as mutual funds or bank deposits. Following a large debt repayment, you can begin to recover your fortune.
Stop taking on more debt
In addition to increasing your financial commitments, taking out additional loans to pay off your existing debt increases your level of financial and emotional stress. So, stay away from them at all costs.
Set aside money for unforeseen circumstances
It is crucial to maintain a separate emergency fund which is exclusively used to deal with unforeseen financial situations that may arise. For optimal results, an emergency fund should have at least three to six months of living expenses. Without needing a loan, this fund helps you through the bad times.
This money can be placed in a variety of investment vehicles that guarantee high liquidity. While a bank savings account is a useful way to save emergency funds, it doesn’t offer much in the way of interest rates or dividends. Consider putting your emergency money in a bond fund, which guarantees immediate liquidity and higher returns on your money, as an alternative.
Getting your finances under control can help you avoid the pitfalls of debt and achieve financial independence. To avoid exorbitant interest rates and the pitfalls of debt, be sure to pay off your loans and credit cards on time.
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