How to Avoid Debt Trap?

February 10, 2014

Debt Management

Nowadays, most individuals are in the lookout for happiness that can be obtained by purchasing materials of different kinds. This mentality is no longer just a passion, but has become more like an obsession with more and more consumers falling for such instant luxury or pleasure. As always, such consumers tend to face one of the most common problems of unlimited spending, shortage in their funds. And with more and more lenders and financial institutions ready to provide loans for almost any purpose, consumers automatically get caught in a debt trap.

Debt Trap Explained

Debt trap is basically a situation or circumstance during which the principal repayment amounts and interest payments of borrowers take on growing amounts of their present as well as future earnings, debilitating their ability to deal with their other standard expenses, and thus eventually leading them off to bankruptcy. The major reason for a person to fall into debt trap is his or her growing desires, along with a limited monthly income at

Avoid Debt Trap through Financial Planning

The best way for an individual to avoid falling into a debt trap is by performing financial planning. This approach helps in ensuring that the person leads a life that is absolutely free from financial issues and worries. Financial planning basically comprises of goal based management of the individual’s finances or funds. Some of the fundamental financial goals of an individual usually include: saving up for retirement, enjoying a long vacation overseas, purchasing a dream home, or buying a family vehicle.

In the present financial market, several lenders are readily available to offer loans to individuals who earn a decent monthly income. And as mentioned earlier, this easy availability has increased consumerism among working class individuals. In order to ensure financial prosperity, the individual must first determine his or her own capacity to pay back the loan on time, along with the associated interest rates at

Financial Planning: Principles

Following are some of the common principles of financial planning that will make sure that the individual is not overwhelmed with multiple debts and also that he or she is not wasting the leverages available to them:

  • The net income of the person, after tax payments, must be split into three in order to pay for the following expenses: one third of the income for the person’s current standard expenses, one third for making monthly loan repayments for their existing debt and one third must be saved in the form of an investment for future use.
  • The individual must not take out a loan in order to purchase or acquire an asset that will depreciate in its value, such as a mobile phone or laptop.
  • The amounts spent on those expenses that do not carry a redeeming value must be limited, such as money spent on entertainment, vacations, etc.
  • It would also be better if the debt taken out by the individual provides tax benefits to the person.

In addition to these principles, individuals must be very careful when they use their credit card for making purchases, as they usually carry a very high interest rate, which may be difficult to manage..