‘Financial literacy is just as important in life as the ability to read and write.’
When Finance Minister Nirmala Sitharaman stated this, she invited the nation to understand how crucial it is to learn the skill of Financial Management in order to attain financial stability. The importance of managing financial affairs has increased significantly in the complicated and interconnected world of today. People run the risk of getting trapped in debt due to consumerism’s pervasiveness, easy access to credit, and unforeseen economic hardships.
When you are equipped with information and rigorous financial practices, financial security is within your grasp.
Let us first understand what this death-defying Debt Trap is.
The term ‘debt trap’ describes an ongoing cycle of excessive borrowing and debt accumulation that is challenging to break. It frequently starts with people taking out high-interest loans, recklessly using credit cards, or giving in to impulsive spending tendencies. The accumulation of interest fees and late payment fees makes it difficult to fulfill financial commitments, thus leading to the devastation of many lives.
Also Read: 10 best practices to follow before writing a cheque
Let us explore a few strategies to manage our finances and stay cautious not to fall into the pit of a Debt Trap:
Creating a Realistic Budget: A Foundation for Financial Stability. A budget acts as a road plan for distributing money and keeping track of costs, empowering people to make wise financial decisions.
In India, creating a realistic budget is essential for effective financial management. The Reserve Bank of India (RBI) declares, as of 2021, the average monthly per capita expenditure (MPCE) in rural areas was around Rs 1,729, while in urban areas, it was approximately Rs 3,421. You may make sure that your spending is in line with your financial capabilities by keeping track of your income and expenses.
Why is a Realistic Budget Important?
Financial Awareness: A budget gives people a clear picture of their income, spending, and savings, enabling them to better comprehend their financial condition. It assists in determining areas where costs may be cut, savings can be enhanced, and debt can be properly handled.
Expense Control: Without a budget, it is simple to go overboard and lose sight of how much is being spent on what. A realistic budget lowers the likelihood of building debt by helping to manage discretionary spending, prevent pointless purchases, and prioritize critical necessities.
Goal Setting: An individual can set financial objectives and work towards reaching them with the help of a budget. A budget offers a structure for allocating resources and monitoring progress, whether the goal is saving for a down payment on a home, making retirement plans, or launching a business.
Let us take an example: Rajesh, who lives in an urban area, has a monthly income of Rs 40,000. After deducting his fixed expenses (rent, utilities, etc.), variable expenses (entertainment, dining out), and savings, he has a surplus of Rs 8,000, which can be used for debt repayment or additional savings.
You must be honest with yourself and be ready to make the necessary modifications for developing a realistic budget. It is a dynamic process that needs to be examined and updated on a regular basis to account for shifting financial conditions and objectives.
Minimize Debt and Pay on Time
In India, having too much debt might cause financial hardship. Issues like high-interest credit card debt, personal loans, and payday loans can all lead to a debt cycle. In India, credit card interest rates typically vary from 42% to 52% as of 2023 latest data.
Late credit card payments may result in fines and significant interest fees, according to the RBI. It’s critical to pay on time to avoid late penalties and additional interest costs. High-interest rates on credit cards and loans might result in significant interest costs over time. By reducing debt, people can maximize their overall financial well-being by saving considerable amounts on interest payments.
Let us follow a few tactics to Minimize Debt abs Ensure Timely Payments:
Create a Debt Repayment Plan: List all current liabilities, such as credit card balances, loans, and other liabilities, in the beginning. Sort your debts according to their interest rates, balances due, or personal preferences. To speed up debt repayment, think about utilizing either the snowball approach (paying off the smallest loan first) or the avalanche method (paying off the debt with the highest interest rate first).
Budget for Debt Repayment: Allocate a portion of your income specifically towards debt repayment. This ensures that it becomes a regular and non-negotiable expense in your budget. By dedicating a fixed amount each month, you can steadily chip away at your debt and make consistent progress.
Limit Credit Card Usage: Limit your use of credit cards and instead rely on cash or debit cards for daily purchases. Use credit cards sparingly and make sure you can are able to pay the bill in full each month. By doing this, high-interest credit card debt can be prevented.
Negotiate Lower Interest Rates:If achievable, think about asking lenders to reduce the interest rates on current loans or credit card balances. Financial institutions are occasionally amenable to bargaining, particularly if you have a solid payment history or are in a difficult financial situation.
Increase Income and Reduce Expenses: Discover ways to boost your income by taking on side jobs, working as a freelancer, or looking for a job with a larger salary. Find ways to save money at the same time, such as cutting back on discretionary spending, eating less out, or finding more affordable options for your routine expenses.
Automate Payments:To ensure on-time payments and avoid late fees, set up automatic payments for your debts. To decrease the likelihood of missing due dates, schedule payments in advance via online banking or payment systems.
Seek Professional Advice: If you notice that your debt is out of control, think about getting help from financial experts or credit counselling organizations. They can offer advice, act as your advocate when dealing with lenders, and aid in the development of an individual debt repayment strategy.
Discipline, commitment, and a proactive approach to managing your financial commitments are necessary for minimizing debt and making on-time payments.
Rightly stated by Mukesh Ambani, Chairman of Reliance Industries Limited,
‘Debt is a double-edged sword. While it can fuel growth and expansion, it can also become a burden if not managed carefully. Minimizing debt and maintaining a healthy balance sheet is crucial for long-term sustainability.’
Emergency Fund is a Must
Setting up an emergency fund is extremely important to safeguard against unforeseen financial difficulties. An emergency fund plays the role of a safety net in the event of unanticipated events like medical emergencies, job loss, or unexpected bills. People who routinely set away a percentage of their salary might build up savings that provide them with a sense of stability and keep them from turning to debt when things are tough.
Seeking Financial Education
In order to be able to make wise financial decisions, people need to be financially literate. It entails learning about retirement planning, investing, debt management, and budgeting. People can improve their financial knowledge and learn how to take intelligent financial decisions that are in line with their long-term objectives by actively seeking out financial education through courses, workshops, and reliable resources.
Exercising Discipline and Mindful Spending
Today, Indians are witnessed to buy all essentials right from smartphones to houses on loans. Undisciplined and unplanned expenses can lead to high risks. In order to escape the debt trap, it is essential to cultivate disciplined spending habits. This entails separating wants from needs, refraining from impulsive purchases, and maintaining a well-organized budget. People can maintain control over their finances, allocate resources sensibly, and avoid needless debt accumulation by developing mindful spending habits.
Be Transparent with your Family
Discuss with your family members about your expenses and family income. The family members must have an idea of the income to manage expenses wisely. Make financial plans with your family members and let every member be a part of your strategies as well financial education.
Teach your Children the Value of Safe Expenses
Your children must equally take part in your journey of financial education. Sooner they learn, the better their future will be, and the better they will be able to support you in your expenses.
Ratan Tata, Chairman Emeritus of Tata Sons, asserted,
‘The best way to escape the debt trap is to live within your means, spend wisely, and save for the future.’
Great minds have always reminded us of great lessons on the importance of Financial Management. Keep yourself open to welcome healthy suggestions.
Financial management is not an overnight assignment; it is an ongoing journey that demands commitment, adaptability, and continuous learning. Financial Freedom is impossible unless and until an individual is well-informed and cultivates smart financial practices. People can escape the debt trap, protect their financial security, and pave the way for a more affluent future by adopting a mindset of fiscal responsibility.
(By Basesh Gala, Business Mentor, Investor, Leadership Coach & Public Speaker. Views are personal)