(Last Updated: September 27, 2018)
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How to Avoid Debt Trap ?

  • Hello All,

    I have this habit of getting into a debt trap quite often. Up until now, I have managed to come out of them but the one that I am currently in, is making me anxious and I need your kind advice.

    At present my current take home is 1,60,000 . However, I have loans and monthly expenditures which are close to Rs 1,30,000. For some of the loans that I have mentioned above, I am only paying interest every month and not being able to pay the actual amount that I owe.

    I know that I earn well and can live a luxurious life but because of these loans, I am unable to do things that a person who is earning this much would be able to do. I have kid now and want to get out of this financial problem ASAP.

  • Hi Rajesh,
    You have a good salary and if you plan things systematically,you can easily free yourself from this debt trap.

    1. First of all,you should focus on reducing your monthly expenses.Try saving on few major expenses like electricity,car expenses,mobile expenses etc.Even small monthly savings can a make a big difference at the year end.A bit of sacrifice for some time can help you clear off your debts and add to your overall savings.

    2. Set a fixed budget for yourself and track your expenses and increase your savings.Once you get hold of your expenses try reducing them,this way you can easily reduce your debts.

    3. If your loans include any credit card debt, try to clear that on priority.Avoid using credit cards,they add upon your debts anyways.

    4. You are a family person,so you should be focusing on financial security of your family as well.

    Besides lowering your debt burden,start planning for your long term objectives also.Plan your investments in proper manner so as to get good returns in the long run.

    So,if you plan things wisely, it won’t be a difficult task for you to improve your finances and regain your normal financial situation back.You are already earning a good sum,just a bit of money management is required.Hope this helps ! For any further queries feel free to ask.

  • Hi,Rajesh

    Reducing your monthly expenses really helps.Don’t make the mistake of taking further loans to repay the previous ones.This only complicates the situation.

    Set a budget,keep some money for your EMIs and some for monthly expenses.If you can afford to invest even a small saving amount,go for it.

    It is just a matter of time,once your finances are back on track,you can increase your investments and earnings also.

  • Hello Rajesh,

    I am not going to ask you to do this. “Reduce your monthly expenses” – Easier said than done. Because this is the problem that you have asked in your question. The point here is “HOW”?.

    1. You said that you are paying interest every month and not being able to pay principal. Well, loans bear an interest rate which is usually higher than what your investments (like FDs, low risk SIPs) give you. So, first thing that you need to do ASAP is liquidate some investment and repay your loan. (How much to liquidate, how much to repay, which loan to repay….all these need to be pondered upon and worked out.)

    2. Use credit cards BUT make payment of full outstanding amount, not only minimum due amount (as this will again levy interest) This way, you gain an interest free credit period of around 52 days and also get additional points which can be redeemed later.

  • @rajeshjain The best advice to avoid yourself from the debt trap is to manage your expenses wisely. You believe that you can live a luxurious life but feel burdened with your existing loans.

    • Your expenses seem to be on the higher side as compared to your monthly income. So, firstly set a fixed monthly budget and cut off any additional expenses.
    • Look where you can save more and avoid unnecessary purchases for sometime.
    • Even small monthly savings can help you reduce your financial burden.
    • Look for a side hustle or part time work to earn extra income side by side.
    • Don't create further debt to pay this one.
      Start managing your finances the correct way by moving in the right direction.

  • @rajeshjain
    Just interested in knowing how's your financial planning now?
    Any relief in distress?
    Or still in debt trap?

  • @prateek its easier said than done. Getting out of Debt Trap is very difficult. I am still paying interest only on my loans.

  • I think debt is a bad thing and you have to get rid of it as soon as you can. I think you have to do necessary savings in order to pay your debts by changing your lifestyle for sometimes. Do not spend money where it is not necessary to be spent. I wish you best of the luck!

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