How To Avoid Falling Into A Debt Trap. Here Are A Few Simple Tips

There are a number of reasons why people fall into debt traps. Some people take on too much debt to finance big-ticket items, such as car or a home. If you are struggling, here are a few tips for you

To effectively manage debt, it is important to have a solid emergency fund in place to handle unforeseen expenses.

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Debt can be a useful tool for achieving financial goals, but it can also be a trap that can be difficult to escape. Managing debt properly is crucial to avoid it becoming a burdensome weight. It can create financial stress, hinder savings, and limit future financial aspirations. There are a number of reasons why people fall into debt traps. Some people take on too much debt to finance big-ticket items, such as a car or a home. Others use debt to cover everyday expenses, such as food and clothing. Some fall into debt due to unexpected events, such as a job loss or a medical emergency.

According to Data from CEIC, India's household debt accounted for 14.3 per cent of the country's Nominal GDP in March 2022, compared with the ratio of 14.5 per cent in the previous year. The data reached an all-time high of 14.5 per cent in March 2021 and a record low of 2.2 per cent in Mar 1999.

No matter how you get into debt, it can be difficult to get out. The interest on debt can quickly add up, making it harder to make your payments. And if you miss a payment, your creditors may start charging you late fees and penalties. If you are struggling with debt, there are a number of things you can do to get back on track. Here are a few tips by industry experts. 

Create A Budget

According to the MD and CEO of Zaggle Prepaid Ocean Services Limited Avinash Ramesh Godkhindi, financial well-being is a result of meticulous planning, rational choices, and informed actions. 

Yashoraj Tyagi, COO and CTO at CASHe also echo him saying that people can take proactive measures to avoid the pitfalls of debt and attain financial stability. First and foremost, it is essential to maintain a realistic budget. "By meticulously tracking income and expenses, individuals can gain a thorough understanding of their financial situation and make necessary adjustments. It is equally important to identify and reduce unnecessary expenditures, freeing up funds that can be directed towards debt repayment or savings, all while maintaining a comfortable quality of life,” said Tyagi. 

So the first step to getting out of debt is to understand where your money is going. Create a budget that tracks your income and expenses. This will help you identify areas where you can cut back.

Paying High-Interest Debt First

Avinash Godkhindi's advice is to pay down your high-interest debt first. "To avoid the treacherous debt trap, take three crucial steps. First and foremost, prioritize high-interest debts, which can protect you from a spiral trap,” Godkhindi said adding that “prioritizing your debts based on interest rates is crucial to paying them off efficiently and saving money in the long run. From a strictly financial perspective, the best strategy is to prioritize debt by Annual Percentage Rate (APR).” 

Another way is to consolidate your liabilities. 

“A prudent strategy for managing debt involves prioritizing high-interest obligations and considering debt consolidation. By allocating additional resources towards the repayment of high-interest debts and consolidating multiple debts into a single loan with favorable terms, individuals can expedite their journey to debt freedom while minimizing interest charges over time,” said Yashoraj Tyagi. 

Emergency Funds

To effectively manage debt, it is important to have a solid emergency fund in place to handle unforeseen expenses. By establishing a financial safety net, you can avoid relying on credit cards or loans during unexpected situations. 

According to Tyagi, “By regularly setting aside a portion of income, individuals can accumulate funds to cover unexpected expenses, including medical emergencies. An emergency fund serves as a financial safety net, fostering peace of mind and mitigating potential setbacks.” 

“While debt management is critical, it’s equally important to prioritize building an emergency fund to ensure financial resilience, particularly for unexpected medical emergencies,” said Avinash Godkhindi. 

Use Saving Tools

Leveraging saving tools is pivotal in securing long-term financial well-being, says COO and CTO of CASHe Yashoraj Tyagi adding “Automated savings plans, investment accounts, and retirement funds present opportunities for capital growth and wealth accumulation over time. These tools empower individuals to foster financial resilience and work towards their financial goals.”

According to the MD and CEO of Zaggle Prepaid Ocean Services Limited Avinash Ramesh Godkhindi, saving Tools for a diversified portfolio can help simplify your financial life and reduce your overall interest costs. 

"One should explore a range of saving tools such as fixed deposits, mutual funds, and automated savings apps, which can help you allocate a portion of your income towards future goals. These tools not only foster disciplined saving habits but also provide opportunities for growth and financial security," Godkhindi said. 

Managing debt effectively is crucial for maintaining financial health and building a strong future. In today's world, you are likely to encounter numerous loan offers, tempting you to borrow money for various purposes, even for things you may not truly need. However, it is crucial to exercise caution when considering these loan options. Many short-term loans come with excessively high interest rates and fees, which can trap borrowers in never-ending cycles of debt. To avoid such pitfalls, it is advisable to explore alternative options like banks or reputable financial institutions for loans, if necessary, as they often offer more reasonable interest rates, helping to minimize the overall burden of interest payments.