Coming out of debt trap: A step towards financial freedom
Debt has become a huge component in family’s finances. Spending more money than you make is basically spending money you don’t have or money you are yet to earn. Borrowing irresponsibly and thereafter trying to come out of a debt trap is never easy. It’s never too late to realize that paying off debt is also one of your financial goals. When you are living on negative cash flows, you might be thinking whether you will be in a position to pay off debt as it is scheduled, if not faster. Well, as Certified Financial Planner in Kolkata, we believe that with a realistic debt repayment plan, prepayment of loans is actually achievable. You have to be cognizant of the fact that addressing any personal financial matter requires analysis and informed decision-making. There’s no alternative.
You may be having any/few or all of the below types of loans:
- Home loan(s)
- Loan against properties
- Auto loan(s)
- Credit card loan(s)
- Education loan
- Personal loan(s)
- Gold loan(s)
- Loan against securities
- Business loan(s)
- Hand loan(s)
Sticking to the goal to pay off your debts at the earliest possible requires you to be regimented. The primary step you need to take to come out of debt trap is to figure out how to budget and pay off debt.
What’s a debt trap?
One lands in a debt trap when the income falls short in paying for the EMIs and the interest keeps piling up on the outstanding amount. He/she ends up taking fresh loans to clear off the existing loans. He/she is not paying off anything. It’s just shuffling the debt around and incurring more debt. Before he/she can realize the depth of the damage, the debt situation spirals out of control. Once someone is in a debt trap, it only gets harder with time. The credit score takes an ugly form, savings and goals go for a toss and debts continue to grow monstrous in size.
How will you know if you are actually in a debt trap?
Few signals which you should never really ignore if you are experiencing the following:
- Paying a large part of income as EMIs. If EMIs are 35% of your income or more, then you need to be on your toes.
- Rolling over credit card bills.
- Not able to save and invest any money because of debt burden.
- Meeting regular expenses are funded through borrowings and withdrawing cash through credit card.
- Taking fresh loans in order to repay EMIs against existing loans.
- Bank is starting to reject your loan applications.
A real-life scenario of a family in debt trap
A working lady was looking for a Financial Advisor in Kolkata. She recently approached us for debt planning services as she was overburdened with too many loans. She appeared to be helpless as she was not able to figure out how to pay off debt faster. Initially, she had a sizable amount of EMI against home loan, a car loan, two outstanding credit card bills and an EMI against one personal loan. Her husband, being a spendthrift, is adding to the hardship. Moreover, after giving birth to a baby, her family pressurized her to organize a grand rice ceremony. For that, she was compelled to take a top-up loan to fund the expenses as her family did not help her financially. She has been drowning deeper in debt. It is evident that she’s is in a vicious circle – a debt trap.
She’s a qualified person who’s earning quite well. But, alarmingly, we figured out that 70% of her income is going towards meeting EMIs against all loans. 15% of her income goes out as insurance premiums. She’s not able to make ends meet.
As she went on to share her family matters, we were startled to listen to few instances. Since her job profile is distinguished, her family insisted her that she should own a car and a residential property too as a status symbol. She got carried away. This is where it all started – A home loan to buy a residential property and a car loan to buy her car. Negative cash flow (due to loan burden) and husband’s extravagant lifestyle lead to over usage of credit cards. This chain of events steered them towards the debt trap. As Financial Consultant in Kolkata, we keep advocating that taking financial decisions without preparing and following a Financial Plan can result in terrible consequences.
She’s diabetic. Further, she disclosed that she doesn’t have health insurance cover. All her savings got drained out as pacemaker had to be implanted last year because of her heart problem. She’s uninsurable now due to her ill health. She has two traditional life insurance policies in force. Paying premiums are also becoming stressful to the core because of loan repayment burden. Her husband’s business is not running profitably. Imagine her situation! Neither she is getting financial assistance from her husband, nor are her parents able to help her in any manner. She’s suffering from anxiety. How can she come out of this debt trap? She’s desperate to breathe fresh air.
Once a person falls into a debt trap, it becomes difficult to come out of it because by the time he/she realizes it, the burden has already increased way too much. Debt trap is like vicious circle.
Debt Trap is a vicious circle, it cannot be overcome overnight
What’s the way forward?
Knowing when it’s time to ask for help is important. Leaving it until it’s too late can have a serious effect on your credit profile and even lead you to bankruptcy.
Complicated personal financial situation demands thorough analysis. One more arbitrary decision may invite more challenges. There’s no common answer to a family’s complex financial scenario. Situations are unique for every family. Process of financial counseling varies accordingly.
Scenario planning and analysis is the starting point. As Certified Financial Transitionist in Kolkata, we have to work with the client very closely as this is a hand-holding process. Client’s inputs are really important for us to actually understand what financial situation the family is in. Hopelessness and anxiety are very common traits noticed among the clients. Depending on the same, various action plans can be framed for the better. The negative phase cannot be overcome overnight. It’s a slow and systematic process.
Through time-tested processes and tools, as SEBI Registered Investment Advisor in Kolkata, we intend to bring the clients back on track towards financial wellness.
