If you are paying your home loan, car loan and personal loan EMIs and credit card bills and if you are facing a cash crunch due to which you have to choose between paying electricity bill or society charges, or facing the dilemma of paying your mobile bill or internet bill, then it is a sign that you may have gotten into a debt trap.
What is a debt-trap? A debt-trap is a serious financial crisis where you income does not match up with your liabilities and you are left with no other option but to borrow more to meet your regular expenses. And the more you borrow, the more severe the debt-trap gets.
So, here are three signs that indicate that you are heading towards or have already got into a debt-trap:
1. Using credit cards indiscriminately: If you are in the habit of swiping your credit cards for all and sundry purchases, then you better change your habit for good. Credit cards are convenient because you don’t need to carry large amount of cash in your wallet for shopping, so credit cards tempt you to go on a shopping spree because you don’t need to pay anything immediately. But you have to think about the bill that you will get at the end of the month and avoid using them indiscriminately. Which means you should avoid buying things that you do not need.
2. You have no savings: If at the end of the month you are left with no cash or have very little cash in hand, you are getting into big trouble. Your monthly income should not only match up with your expenses, but it should always be more than all your monthly expenses and, at the end of the month, you should have 10%-20% of your income to be set aside as savings. These savings can be pooled and invested in other asset classes, such as fixed deposits, mutual funds, gold, etc. If you do not have any investments, but struggle to make your ends meet due to your debt repayments, it is likely that you may have got into a debt-trap.
3. Use debt to repay debt: If you have to borrow more to repay previous borrowings, it is a sure sign that you have got stuck into a debt-trap. If you go about borrowing from your relatives and friends to clear your outstanding debt or use one credit card to pay up the bill of other credit card, you are heading for a serious financial crisis and the earlier you get out of this situation, the better.
So, if you wish to live well, it is always better to live within your means.