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Be financially disciplined to avoid a debt trap

By Deepak Jain

08 June, 2011

With an economy flooded with irresistible consumer items and services it is difficult to withstand the urge to buy things on credit, so many people find themselves getting into debt. One never knows when one really gets caught in a debt trap, until one has to star borrowing to make pressing interest payments and outstanding loans. If you are financially disciplined and determined you can stay out of financial trouble.

Here are some tips which can help you avoid falling into debt trap.

Face the truth about your financial situation: Take a hard look at your income and your outgo. Find out exactly where you are, financially, in relation to where you need to be.

Prepare a workable budget and stick to it: Set realistic goals. Know where you are going and how long it will take you to get there. Then decide the path you need to follow to reach that goal.

Review your spending habits. Where are you overspending? What is necessary? Design a budget that incorporates the necessities but discourages impulse shopping. Then develop the discipline and stick to your budget.

Plan your investment carefully: When you invest in something that requires a huge outlay, say a house or a car, consider how this would affect your finances. It is also important to analyse current economic conditions when you make investment decisions. Seek expert opinion whenever you are in doubt.

Make the necessary sacrifices: Discipline yourself by not giving into those whims. Tailor your lifestyles to your present financial capabilities don't bite off more that what you can chew. Save whatever you can for the rainy days.

Avoid buying on impulse: Try to anticipate you family's need for, say, a month or two, so that you know what are will be your unavoidable expenses. When shopping, bring along a list of items that you really need to buy. Leave those credit cards at home.

Limit your buying on credit: Buy things it cash, whenever possible. In cases, however, when you have no other resource but to borrow money or charge items to your credit card, try to see its repercussions on your cash flow for the succeeding weeks or months. Buying on credit is good if you have the cash to pay. While by following these rules you would not fall into the debt trap what if you are already into debt and find managing your debt difficult.

Here are some steps you can take to come out of debt trap.

Avoid taking fresh debt: As a first step towards debt management, you should avoid getting into new debt till the time the old dues are cleared in full. Lock all those credit cards in the locker.

Increase savings: List all your past expenses, say for last 12 months, and mark them as necessary and discretionary. Cut down on all discretionary expenses to increase savings to pay off the loans.

Prioritise you debt repayment: You need to prioritise your dues and begin clearing them. You should know the costliest loan, that is the loan with the highest interest rate you have taken, and this is the one you should clear first. For instance, clearing your relatively cheap housing loan won't pay much if you are having huge credit card dues or other costly loans.

Debt consolidation: You can also resort to debt consolidation. It basically means replacement of multiple loans with a single loan, often with a lower monthly payment and a longer repayment period.

Refinance: Refinancing your debts to a cheaper deal is one of the most effective ways of freeing money up and making loans more palatable.

Extra income: Look for extra sources of income to augment your ability to pay off the loans faster.

Remember borrowing is not always bad but you must borrow only for investment purposes and not for consumption reasons. If you borrow money to invest in assets which would appreciate in value over time like a house or land it is good but if your borrow money to buy that latest iPad or going for vacation then it is wrong.

Financial discipline is not born you need to cultivate it and learn to spend within your earnings and not above it.

(Deepak Jain is a CFPCM, and is working as AVP-ac-ademics in New Era Institute Of Professional Studies. The views expressed here are personal, and do not necessarily represent that of the organisation. FPSB India is the sole marks licensing authority for the CFPCM marks in India.)