How to Improve your Financial Health

Most of us are living on borrowed money. In the US, as per Experian, credit card debt is $829 billion and personal loan debt stands at $305 billion. Retail credit card debt stands at $90 billion.  According to TradingEconomics, in China, household debt stood at 55.20 percent of GDP in the fourth quarter of 2019.

Everyone would like to have zero debt, but circumstances prompt them to borrow for their education, their marriage, their children’s education and so on. To make life full and fun, expenses are made on vacations, restaurant meals, theme park visits, shopping, hospital visits and the movies. The income of an individual cannot often support all these expenses which sometimes happens concurrently. Most households end up being heavily leveraged, and ensnared in a debt trap. 

The journey into a debt trap is usually a slow and painless one, until one day, you realise you have way too much debt. How do you recognise you are in a debt trap?

Your monthly equated installments (EMI) are more than 50% of your total income. You have high fixed expenses and you borrow for regular expenses such as rent or the children’s school fees. You borrow frequently to meet your needs. This could be taking hand loans or personal loans to go on trips or house maintenance. People who are knee high in loans tend to take an overdraft or cash withdrawals from their credit cards. This is dangerous, because you are taking money with higher interest to pay a loan with lower interest. If you are unable to pay utility bills or the minimum amount on your credit card balance, it is a sure sign you are in a debt trap. Some  serious lifestyle changes along with financial re-engineering is in order.

Good financial practices include budgeting within your income, saving up for big ticket purchases, using your credit card sparingly, not having more than two loans running concurrently and investing wisely. Unfortunately, this is not always practiced, sometimes because of poor financial habits and sometimes because of circumstances. Today, many people are losing jobs or facing pay cuts due to  reduced consumer demand because of the pandemic caused by Covid-19. There are simply fewer jobs and more budgetary cuts. Expenses however remain unchanged and in many cases expenses within the household have increased. 

Fortunately, there are many ways in which we can dig ourselves out of the debt holes we find ourselves in. 

Consolidate your debts

Before you start repaying a penny, prepare an excel sheet of your debts. Consolidate them with their corresponding interest rates. Note down their due dates as well, there is no need to pay a late fine in addition to the exorbitant interest rates you have to pay for them. Make provisions like giving the mandate for ECS or automated electronic clearing services with your bank. Do ensure you have sufficient funds in your account.

Make the minimum payment on your credit card

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