Debt is money that is borrowed and is meant to be repaid. When you’re unable to repay it (for whatever reason), you can end up in a debt trap that’s difficult to escape.
Borrowing is a way of life for many consumers (especially for businesses).
Taking personal loans, home loans, or car loans is common, but it takes up a substantial part of your monthly income. And when you mix it with credit card debt and your monthly expenses, it can get quite difficult to manage your finances, leading to a debt trap.
What Is a Debt Trap?
A debt trap is a situation where it is impossible to afford the repayments on the borrowed amount, usually because of high interest costs.
When your spending is more than your income, you eventually go into debt.
How To Get Out of The Debt Trap?
We’ve given a few tips and strategies to help you get out of debt:
1. Understand Your Finances
The first step is to understand where you stand financially in terms of income, savings, expenses, investments, debts, etc. Figure out your total household income. Next, get insights into your expenses. Then, determine the savings amount (income-expense).
Finally, layer in the investment you’d like to make, debts you need to pay, funds you need for your child’s college education and other personal expenses.
2. Create A Monthly Budget
A budget can help you get out of debt if you use it wisely. The main focus of a budget is to track your spending and savings against your monthly plan.
Following a budget plan will help you identify the problem areas and understand the lifestyle changes you need to make to get out of debt.
3. Invest To Make An Asset For Passive Income
Investing in stocks and small saving schemes help you earn dividends and steady returns, which you can use to repay your debt. However, if you are in too much debt, you may want to revisit this option again at a later time and make it a habit to invest from your salary regularly.
4. Avoid Using Credit Cards
Credit cards are excellent tools, but they can easily make you fall into a debt spiral.
The high interest rates on credit cards make you pay a lot more than what you owe. So, stop using it at least until you have cleared your debt.
5. Change Your Habits
Small financial habits such as grabbing lunch with colleagues, eating out with family on weekends, or going to concerts or movies are good expenses, but not when you are in a debt cycle.
If you want to get out of debt, you’ll need to make certain lifestyle changes, one small change at a time.
6. Lower Your Borrowing Costs
If you have multiple high-interest debts, it is a clever move to take a low-interest loan to consolidate the debt.
Debt consolidation with the right loan can help reduce debt faster.
7. Diversify Your Income Sources
Having more than one income source helps you earn extra money and pay the debt faster. This can go a long way in making your life a bit easier. You can either take a part-time gig such as being a music teacher or sports coach, or give tuitions on weekends. Start a small business if it’s your thing.
8. Live Below Your Means
This is not exactly a tip to get out of debt, but it goes a long way in helping you avoid getting into debt.
Spend your money cautiously. You might be able to afford a lot of things with the help of loans, but it doesn’t necessarily mean that it’s the right choice. For example, don’t purchase a house now that you’ll have a hard time repaying it or don’t buy an expensive car when all you can afford with your current financial standing is a smaller car.
By living below your means, you are setting yourself for financial success now and later on in life.
9. Save For Emergencies
Most of the time, people end up in a debt trap because they weren’t prepared for unforeseen circumstances.
Debt is usually unavoidable in such circumstances, but it could have been easily avoided if you had saved up for emergencies and unexpected expenses. If you don’t have an emergency fund, set up emergency fund immediately and try to build at least 3 to 6 months worth of living expenses.
Getting out of debt is a stressful and overwhelming experience. But if you are aware of the process and have put an action plan in place, it can get a bit easier. So, follow the 9 ways to get out of debt listed in this article and make progress in your pursuit of being debt-free.