by teamrecBorrowing has become indispensable these days. People borrow either to create assets that would result into bumper crop or to spend on impulsive purchasing that would lend them into a trap. Every planned borrowing, to create some appreciating asset, is welcome and improves health of wealth. On the other hand, every borrowing to satisfy our passions and temptations leads to deteriorating health of wealth. It means depending upon utilization the same debt may prove fruitful or harmful.
From individual’s point of view housing loan is the only productive loan. In similar way, life saving loans for critical illness or accidental hospitalization is necessity. Any other loan which does not increase earning potential is a serious problem and may severely harm health of existing or futuristic wealth.
We must avoid accumulating debt at any cost. Wayward spending habit leads into a debt trap and it is very difficult to come out of debt trap. It takes a lot of time to repay debts and during this period one may miss big opportunities. Prevention is always better than cure. One must avoid falling into a debt trap. Any default on repayment results into dent in credit worthiness. As a professional, one must respect and protect his credit worthiness at all cost. Some of the tips are reproduced herein for the benefit of one and all:-
CLEAR OFF THE DUES ON OR BEFORE THE DUE DATE
One of the modern way to fall into debt trap is to accumulate credit via credit cards. Initially, people fail to understand a credit card statement. Minimum amount due is usually misinterpreted and people think that they have to pay just 5% of the due amount and they do not realize that the company charges very high interest on the remaining amount. Not only interest they charge in more than one ways. One should carefully clear off the dues before the due date that also in a way that payment reaches the card provider before due date. Lure of multiple credit cards is very dangerous and surest way to fall into debt trap.
CHANGE THE MIND SET
Gone are the days when loan taking was social taboo. Modern mantra is: ‘consume first and pay later’. While following this theory, one must take care of unplanned expenditure in foreseeable future, such as illness, accident, loss of job, no increment, family expansion, casualty in family, social expenditure in the form of marriage, etc. Take care. There is need to change the mindset. The mantra needs to be rewritten: ‘Consume first but not very fast’ or ‘Consume only surplus income not full future income’ or ‘Consume first and pay faster’. While taking the loans, one should be very careful of the jargons such as flat or last payment first or foreclosure penalty and so on.
LIMITED EMIs
Periodicity of loan should be restricted to minimum possible. Multiple consumer loans shall be avoided at all costs. Long term loans or multiple loans are not very wise decision. Recession in the economy or physical / mental incapacitation can result into a salary cut which may upset repayment capabilities. Interest on interest shall be treated as dragon. Ideally EMIs shall be restricted to 70% of the surplus income and rest 30% of the surplus income shall be left for un-planned expenditure.
SHORT TERM PLANS
One must have short term financial plans also along with long term plans. Long term plans like plans for daughter’s marriage, old age pension, retirement planning are incomplete unless aligned with short term planning like further studies, dream vacations, housing and vehicle needs. Saving shall be properly invested. Systematic investment plans are must for each one of us.
AVOID IMPULSIVE PURCHASES
Most expert’s feel that one should not borrow at all. One should wait a little longer to fund the purchase rather then to opt for a loan. Though it is very hard to wait for own funds but it is a very wise decision to buy anything by own funds. Impulsive purchases are often identified as the main reason behind debt traps.
FINANCIAL ANALYSIS
Before opting for another loan one must analyze financial aspects. There are two ratios which show the financial strength of a person. First – EMI to Income ratio; and Second asset to liability ratio. Both the ratios are inversely related to each other. More EMI means more liability and less EMI means less liability. One must focus on increasing income on one side and assets on another side. Depreciating assets to appreciating assets ratio is another important tool for analyzing financial strength of any individual.
Take care, don’t fall into debt trap. Take care of unplanned expenditure that also through your income not through fresh debt. Take debt but only to add on appreciating assets not for depreciating assets. Invest your saving wisely. Rather suggest your friends also to invest wisely.
ABOUT THE AUTHOR
Mr. Nitin Kumar, Director, Ethical Investment Solutions Pvt. Ltd and President, Ethical Real Estate Consultants Pvt. Ltd, has 10+ years of experience and expertise in primary and secondary financial market (Stock market, Mutual Fund etc.), insurance and investment opportunities in real estate.
He is a qualified Company Secretary from Institute of Company Secretaries of India. After working with PN Vijay Financial Services Pvt. Ltd, he moved on to start his own venture Ethical group of companies.
