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Introduction
On many occasions, loss of job or delay in payments from clients or a medical emergency can leave us cash-strapped. But more than unfortunate series of events, it is our poor financial habits that get us trapped in a debt cycle. Indeed, loans and credit cards help us meeting or financial needs but they should not become a way of life with most of the income going in credit repayment . However, many people avoid their deteriorating financial health that they do not even realize that they are getting into a debt problem. The first step towards leading a debt-free life is to realize that you have a debt problem and then working towards getting rid of it in the most effective manner.
So, look for these following warning signs before you land in debt crisis without even realizing it.
The Warning Signs
Your expenses are more than 80% of your income:
If a person’s fixed obligations that include all kinds of non-negotiable expenses like EMIs, monthly bills, rent, health insurance, etc. are more than 70-80 percent of the income, then the person has a debt problem because, with the remaining 20 percent, one can hardly save anything. It always leaves the person less equipped to meet financial emergencies. It can happen if you are either spending too much on your lifestyle or have too many loans going on at the same time.
You are denied loans and credit:
If your requests for a loan or a credit card have been denied, or you are getting them under very poor terms, it means your creditworthiness has taken a massive hit. The lender must have checked your credit history and found records of your defaults on payment or maxed-out credit cards. In such situations, you need to take stock of your financial situation by reviewing your credit reports and correcting any error or outdated information.
You regularly default on your payments:
If you are able to make only the minimum payment on your credit card or are regularly defaulting in payment, you are in major trouble. Making defaults not only ruins your credit score but also puts an extra financial burden on you with penalties. Forgetting payment once or twice can be excused but if it becomes a habit, it can lead you towards a debt trap.
You receive calls from debt collectors:
You are at the end of your rope if you start getting calls from debt collectors. They can threaten you to pay balances at unfair terms. The experience can be daunting so always try to borrow as per your ability to pay back.
You are not saving:
A certain percentage of your income should go in your savings account, as these savings will help you in times of crisis and in making your future financially secure. However, if all your income is spent in repaying EMIs and other monthly bills, you may have a debt problem.
Ways to avoid excessive debt
Accepting that you have a debt problem is just half the battle. Now you have to implement corrective measures to overcome them. Here are some ways you can avoid falling in excessive debt:
Make monthly budgets:
You must evaluate your monthly income, expenditure, and savings after analyzing your spending pattern of about the last three months. After which you should prepare a budget and try to stick to it. Budgeting helps you keep track of your money and as a result, you are always aware of how much money is left after paying the bills.
Cut back on unnecessary expenditure:
Budgeting gives you insight into where all you are making the unnecessary expenditure. You can’t ignore the home rent, school fees of kids, transportation charges, groceries bills, society maintenance fee, the EMIs, etc., but you can always postpone the plan of buying a treadmill or cut down on the subscription of multiple movie-streaming outlets and dinners at fancy restaurants , among other things. Before buying anything, ask yourself if you really need it or if you can settle for any other alternative.
Start saving:
Just like the saying, ‘Penny saved is a penny earned’ the importance of saving can never be undermined. You can create separate accounts for general savings, an emergency fund, and one for your life post-retirement and contribute a little in each of them on a regular basis. Start by saving with 5 percent of the income and increase it, as the situation gets better. Also, look at ways of increasing income so that you can save more. Switching to a better-paying job or by doing a part-time job, or by investing in schemes that offer significant returns are some ways of doing it.
Pay your bills on time:
To save more, you must not incur more debt and one way to do that is by paying your bills on time. Delay in payments leads to penalties, which means additional expenditure. Prepare spreadsheets about pending bills and monthly EMIs and set reminders for making payments before the deadline.
Conclusion
It is never too late to get out of the debt trouble. There are many benefits of living a balanced debt life but to achieve that one must first identify the habits that are leading you to fall into a debt crisis and take concrete steps to change those habits. Remember, in case of debt, both denying and delaying are detrimental things to do. Believe that you can improve your financial situation for better. With time, planning and willpower, anyone can attain financial stability and eventually financial freedom.
The act of paying out money for any kind of transaction is known as disbursement. From a lending perspective this usual implies the transfer of the loan amount to the borrower. It may cover paying to operate a business, dividend payments, cash outflow etc. So if disbursements are more than revenues, then cash flow of an entity is negative, and may indicate possible insolvency.
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