Top 10 Money Mistakes That Can Land You into a Debt trap
Managing your finances well and growing your savings are essential for salaried individuals. Although we all know that keeping our expenses low is important – the flexible loan options and credit cards may land you into a vicious circle of overspending and underpaying. If the state of your finances is worrisome, take a look at the ten money mistakes listed below. You may have made one or more of these unsound financial decisions in the past. Know more about them to avoid them in the future as you rectify your financial situation –
1. Paying Only the Minimum Required Amount in Your Credit Card Bill
The best way to use a credit card is to pay the entire outstanding amount at the end of every billing cycle. Keeping your credit card bills clear doesn’t allow the credit card company to charge extra interest on the due payment. If you pay only the minimum required amount is a sign that you are falling into a debt trap.
2. EMI Payments Exceed 50% of Your Income
Impulse buying and spending on tempting schemes, discounts, and easy EMIs may be the reason why you are financially unstable. EMIs that exceed fifty percent of your monthly income strain your finances and leave you with very little money for your basic expenses in the month.
3. Monthly Fixed Obligations Amount to More Than Half Your Income
Apart from EMIs, there are several fixed obligations in a month. It includes house rent, school fees if you have children, society maintenance fees, utility bills, etc. If all of these bills amount to more than fifty percent of your monthly income, you may land yourself in a debt trap very soon.
4. Dipping into Your Savings to Meet Regular Expenses
Meet regular expenses with your regular income every month. It is a big reason to worry if you periodically withdraw out of your emergency funds, children’s education fund or savings account to meet your regular expenditure. If there is an emergency, you could run out of funds and fall into a debt trap.
5. Borrowing Based on Your Future Income
Future income like expected salary increments or bonuses cannot be relied upon. If you borrow money, hoping to repay it when you receive a salary hike in the future – it may land you in trouble. There are no guarantees about the income you think you will receive in the future and it may be delayed or canceled altogether.
6. Loan for Regular Expenses
If you are borrowing to meet your regular expenses in a month, it is a sign that you’re not managing your finances well. Payments such as house rent, school fees, groceries, and utility bills should not be met with borrowings. The answer lies in increasing your income enough to pay the bills and repay your loans.
7. Refused a Loan by a Bank
If a bank has refused your loan application, it means that your credit score has fallen below the acceptable level. Your credit score depends on your creditworthiness and the state of your finances. Banks offer loans only to those with a credit score of 750 and above.
8. Buying Gadgets in ‘easy EMIs.’
NBFCs and banks offer easy loan options for you to buy fancy gadgets on EMIs. But these ‘easy EMIs’ come with high-interest rates of eighteen to twenty-five percent. Indulging in such shopping sprees can mess with your finances and push you into debt.
9. No Savings
Living pay-check to pay-check can set you up for financial failure in the future. Spending everything you earn to live comfortably in the present is not a sound financial strategy. It is always better to cut down on your expenses and save a part of your monthly income for the future.
10. Loan to Repay Loan
Taking a new loan to repay an old one is a financial blunder that can ruin your financial state for a long time to come. Multiple loans are expensive and bring you closer to a debt trap.
Now that you know what financial decisions to avoid, know that debt is not evil. Taking up necessary debts at the right time, when you can repay – may also be a stepping stone towards financial success. Debts such as home loans or student loans help you build a better life. However, excessive debt may adversely affect your personal life and mental health. So, avoid falling into a debt trap and curb your expenses when there is still time. Look out for the warning signs of debt problems listed above and if you find yourself in a debt trap, seek professional help.
Shiv Nanda is a financial analyst who currently lives in Bangalore (refusing to acknowledge the name change) and works with MoneyTap, India’s first app-based credit line. Shiv is a true finance geek, and his friends love that. They always rely on him for advice on their investment choices, budgeting skills, personal financial matters, and when they want to get a loan. He has made it his life’s mission to help and educate people on various financial topics, so email him your questions at email@example.com.