Here are some ways in which you can ward off the temptations that play havoc with your finances

Crawling out of a debt trap isn't always an easy task. Talk to any survivor and he or she will tell you it means a lot of wasted time and opportunities. For example, Ramesh Iyer is never tired of repeating how he got into the debt trap with his wayward spending habits and how it took him almost five years to wipe it off. By the time he was starting all over again, his friends were buying houses and cars.

"The prices were down, interest rates were down… I always feel like that I missed a big opportunity," he says. This is a routine refrain among those who have burnt their fingers with multiple credit cards, personal loans, consumer loans and so on. "We all talk about getting out of a debt trap, but we don't tell people how not to fall into the trap. The trouble is once you are neck deep in it, then it takes a lot of time and effort to clear the debt," says Iyer ruefully.

Swipe Carefully:

True. Why do you land in a tight spot in the first place when you know it sucks out a few years of your life? "Most people unknowingly accumulate huge debt. One of the easiest ways to fall into the trap is to accumulate credit via a credit card," says Kartik Jhaveri, director, Transcend Consulting, a wealth management firm. "Most people don't understand a credit card statement. They wrongly interpret the minimum amount due and think that they just have to pay the 5% of the due amount. They don't realise that the company charges exorbitant interest on the remaining amount." That is why Sajag Sanghvi, a certified financial planner, advises clients to use credit cards wisely. "It is fine if you are travelling and using your credit card, but you should be careful to clear off the amount on the due date," says Sanghvi. "But the trouble is people use multiple credit cards and they use the revolving credit facility and slowly end up in debt."

Go Easy On Purchases:

Personal loans and consumer loans come next on the list. According to financial experts, thanks to the easy availability of credit, people are shopping as if life is one big sale. "It is no more a taboo to opt for a loan. These days the mindset is if you can't afford something, opt for a loan and buy it immediately," says a wealth manager, who declined to be quoted. "Earlier, people used to think hard before opting for a loan, that is not the case anymore. In fact, we are amazed to find huge EMIs on very young people who have just about started their career," he adds.

Most experts share the wealth manager's aversion towards borrowing. Borrow only if it is absolutely necessary. Also, borrowing is fine only if you are creating an asset that would fetch you money. This is the advice that financial wizards have for impulsive shoppers. "The trouble is that when people opt for personal loans to buy things which are really not necessary, chances are that they might default on repayment," says Jhaveri. The trouble with easy loans, says Sanghvi, is that people don't understand that they come with an interest rate of around 20%. Needless to say, piling on innumerable loans is a sure-shot way of landing yourself in a debt trap.

Restrict Your EMIs:

An EMI for a housing loan, another for a car and one more for that LED TV… the list is endless. In fact, according to experts, many unfortunate individuals actually discovered the list of EMIs when they faced a salary cut during the slowdown in the economy. "When people don't think twice before opting for a loan to buy something, it is bound to happen. They confuse the cash flow with permanent income. They don't understand any setback on the career front can upset their calculations," says the wealth manager.

Budget Your Purchases:

Want to buy an LED or an expensive music system? Well, prepare a financial plan to buy it. Financial planning is not restricted to saving for your daughter's education or retirement. It is a useful tool to achieve your short-term goals like expensive purchases. Do you remember how your parents' generation used to save up for every major purchase? "Why should one plan only for major goals like retirement? One should have plans for one, two or three years also," says Sanghvi. "This will ensure that at least you will partly fund your acquisitions." According to experts, making large contributions will make sure that you are better off even if there is a steep increase in the interest rates.

Don't Borrow At All:

This may not go well with many people, but experts are of the view that one should try to avoid accumulating debt at any cost. "Why should you buy things for pure consumption on credit? You should ask yourself whether you can wait a little longer to fund the purchase," asks a financial planner, who doesn't want to be named. Most experts feel that one shouldn't borrow at all. The only exception they makes is for housing, which they consider is a must. However, he adds that it is very difficult to convince clients to wait for the purchases. "When something is easily available why would wait more," he asks philosophically. Sure, this may be bit hard to practice. But try as much possible to stick to the adage as impulsive purchases are often identified as a the main reason behind debt traps.

Do A Health Check:

Gaurav Mashruwala, a certified financial planner, says he normally looks for some signs (or ratios if you will) to find out whether the person has a problem with spending. "There are two ratios which tells you the financial aspect of the person. One, how much is his EMI to his income. Two, what is the ratio of his total liability to assets," informs Mashruwala. If these ratios are on the higher side, he then subjects them to further queries like why the person is borrowing, what is the repayment schedule and so on.

"If the borrowing is for a genuine need like critical illness or the repayment schedule is for a year or two, it is fine. Otherwise, it is a serious problem," says Mashruwala. "In a decade, there will be at least two business cycles, where there could be job loss, salary cuts and so on. If a person is servicing a debt for five or six years, he can really run into trouble during this period."

Source: http://epaper.timesofindia.com/