Understanding Debt and Avoiding Falling into a Debt Trap
Updated: Jan 10, 2022
It is a common misconception that attaining financial freedom means being entirely free of debt. However, it’s often not the case, as some debts are beneficial to your finances. Taking loans here and there can give you a financial advantage if you make timely repayments to clear them.
It is important to identify good debt from bad debt and sort out your repayments to avoid falling into a debt trap.
This article will run you through everything you need to know about debt and how to get out of a debt trap.
1 - Know Good Debt and Bad Debt
Good debt is the debt that generates revenue. You may use your loan to purchase an asset or set up a business that will generate revenue for a long time. Bad debt does not generate any revenue and may even depreciate.
2 - Determine Your Debt Problem
The first step of getting out of a debt trap is acknowledging your predicament. This allows you to determine the problem and analyze what you can do to repay your debt.
You will need to track down where your money goes, which debts you should be paying off immediately, and which debts you can consolidate.
3 - Segregate Your Needs
Sort out which among your expenditures are essential, semi-essential, and non-essential. Refrain from purchasing non-essential luxury items when you are in a debt trap.
You may want to look for cheaper alternatives for semi-essential items or refrain from purchasing these if possible. Limiting your expenditures to the essentials can help you in your debt repayment.
4 - Prepare an Expenditure Plan
Debt repayment may entail changes in your spending behavior. It helps to have a set expenditure plan to allocate a budget on specific items and limit unnecessary spending. This is an excellent way to save money and repay debt.
5 - Consolidate Your Debt
If you have several loans with different interest rates, you can consolidate your debt under one personal loan. This way, all your loans will be under one installment loan with a set repayment amount and date. This can help simplify your debt repayment method.
Have an Emergency Fund
An emergency fund is a specific savings fund allocated in case of accidents or any scenario where you are out of work for a few months. This fund will let you comfortably manage your expenses and sustain yourself without having to fall back on a loan.
Other Tips for Keeping Your Debt in Check
Little habits can help you avoid the debt trap, such as:
Use your credit card wisely and pay attention to your monthly credit card statement to avoid going over your payment capacity.
Take out small personal loans only when necessary, and don’t use them on something inessential to avoid defaulting on a loan.
Have a set financial plan for your expenses, whether that’s for your child’s education or your household budget.
Always save a portion of your income to ensure you don’t spend more than you need to.
Financial freedom does not necessarily mean being free from all debt. There are good debts that can help you generate income. Keeping your debt repayments in control is essential to avoid falling into a debt trap.
Are you looking for personal loans in Madison County, TN? At First Finance Company Madison, we will help you attain an affordable payment plan. Send us a call today to learn more!