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I STRIVE TO MAKE THE WORLD A BETTER PLACE TO LIVE.

Sunday, December 16, 2012

AVOID THE DEBT TRAP

“Rather go to bed without dinner than to rise in debt.” - Benjamin Franklin.


The debt trap is one of the root causes of the lethal depression. Thousands of innocent persons commit suicide after being badly tortured by their heartless and cruel creditors. Debt Trap is a situation where one has to borrow fresh money to repay his current debt but his debt obligations go on increasing day by day. This is the most painful situation. The victim spends sleepless nights & restless days. Many of them embrace the cold and cruel death to evade their ruthless creditors.



The billion dollar question is how one can pre-empt debt trap or get rid of it to lead a tension free life? First, let's diagnose the severity of the problem by drawing a simple balance sheet. 
Please take one piece of   paper and draw a vertical line in the middle. Please write liabilities on the left side and assets with their market value on the right side. This is a simplified balance sheet and we will not go in pure accounting standard.
               LIABILITIES                                                             ASSETS
Consumption Loans                                                                Demanding Assets:
a) Such loans that are used to finance consumables and         a) Such assets which always ask cash e.g.
e.g. luxuries                                                                                 Your car, air conditioner, refrigerator, etc
credit card loan, car loan, house decoration loan etc.,



Development Loans.                                                             Contributing Assets.
a) House Loan, Education Loan for studies in good              b) Such assets which give you passive         
    Institutions where getting knowledge will help in earning       income in the shape of rent, interest etc e.g.     
    More.                                                                                   Fixed deposits, shares, bonds.            Now add the value of your assets and liabilities. Your total assets - Your total liabilities is your net worth. Now please concentrate on
 1. Increasing your total assets every month with special attention to increasing your contributing assets.
 2. Decreasing your total liabilities every month with special attention to decrease your consumption loans.
 Ideally, one should not have any credit card loan or other consumer durable or personal loan. There remains no collateral security to secure these loans. Banks try to recover these loans within a short span of time, therefore, their loan repayment instalments and interest rates are kept high.  Moreover, consumer durables such as air conditioners, refrigerators, cars etc, consume your hard earned money continuously on their maintenance. Thus, they become big reasons to put persons in a debt trap.
If you are already in a debt trap, please analyse your income and expenditure details and curtail avoidable expenditure. Please involve all the family members in this exercise. They must know how bad the situation is? Their suggestions will not only generate synergy but they will also refrain themselves from demanding unavoidable things. Before demanding costly  things, my son always asks, "Can Papa's budget accommodate it?"
 Thus, you will be able to save some money. Use this money to repay your credit card loans and other high-interest loans .Please keep your family members abreast of the improving situation. They will become involved in the process and will discover more ways to cut avoidable expenditure. You may also contact your bank to convert your credit card loans into personal loans. 
You can't extinguish the fire if you don't restrict it. Simultaneously to cut the debt trap you must immediately stop availing fresh loans. However, you may explore a possibility of converting high- interest loans into low-interest loans. Also, use a little self-control and willpower to start liquidating highest interest paying loans by curtailing avoidable expenditure.
 After liquidating all loans one by one, start using your savings for obtaining contributing assets. Your contributing assets are like your good sons. They will continue to contribute to your income even after your retirement and make you stand upright with dignity and self-respect.

 Please also read my another article "SAVE,SAVE & INVEST MONEY." which is both useful and interesting. Please don’t wait for any auspicious day, start today itself, "Well Begun is Half Done". 





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