Recently, I read an excellent article from Uma Shashikant about the signs of a person battling with debt. Remember, the person who is in debt trap or nearing one may not tell you if that’s the case. However, if you see such signs and realize that your friend or family member is struggling with debt, you can try help them.
What about you? Are you struggling with debt? You may not acknowledge or realize but there are some very common signals.
- You consistently struggle to pay your credit card dues on time. Most of the times, you just manage to make the minimum payments.
- Were it not for the credit cards, you find it difficult to get through the month. Essentially, you are borrowing to fund even your monthly expenses.
- You are utilizing your card limits to the fullest.
- You are paying off too many loans.
- Most of your income goes towards EMIs and card payments.
- You have to take out personal loans on a very regular basis. More importantly, you have to borrow (even from friends and family) to settle previous loans and square off credit card outstanding.
- Your credit score is suffering.
Many times, some of these aforesaid issues can crop up simply because of your nature of work. You may be forced to use your credit card extensively simply because you cashflows are irregular or the cash inflow and outflow timing does not match. Many self-employed professionals may face this issue. Therefore, you have to see the applicability. However, do note, even in this case, the financial position is precarious. So, no debt troubles for now, but can easily slip into one.
After all, credit cards and loans are a way to pre-pone consumption (purchases) that your current cashflows or finances can’t afford. A home loan is a classic example. So, loans are not necessarily a problem. A loan becomes a problem when you can’t repay it. The magnitude of the problem depends on if this mismatch is for a few days, weeks or months. A few days or weeks is still manageable.
If rub of the luck goes against you (medical or financial emergency in the family), your hand may be forced. You are forced to borrow. Medical emergencies in the family are one of the common reasons why families get into debt trouble. One of the ways to avoid or reduce the impact of such situations is to have adequate health insurance and a medical emergency fund.
However, you do not always slip into debt problems because of bad luck. Many times, the blame lies squarely upon you. Simply said, you are living beyond your means. If you understand the signals as discussed above, you may be able to take corrective action. When it is about lifestyle choices, the debt position typically does not worsen at one go. Initially, there is a minor problem. The interest cost, penalties and of course keep-up-with-the-joneses approach gradually compounds the problem, resulting in a debt trap. i.e., no matter what you do, you can’t seem to pay off those loans. To put it another way, with your cashflows, it seems impossible to repay the debt. And you would know that you are in a debt trap. Once you are in a debt trap, you will have to take very drastic measures.
The key lies in realizing that something is not right with your finances and you shut the problem out at an initial stage. An even better thing would be to realize if you are susceptible to a debt trap or debt troubles. For instance, you may not have any debt troubles at the moment. However, your susceptibility to get into debt troubles can still be very high. All you need is an unfortunate nudge in form of job loss or a medical or a financial emergency.
This can happen if you have not been planning your finances well. Some of the signs that may imply susceptibility are:
- If you have been able to borrow more than you can afford and there is nothing left to invest/save after providing for monthly expenses and EMI. A significant portion of your income goes towards loan and card payments.
- You are struggling to build up any emergency buffers. After all, the emergency fund is your first fall back option in case of a financial crisis. In absence of such a buffer, you are forced at borrow. By the way, from the point of long-term financial well-being, even simply building up emergency buffers is not enough. You must manage to make some long-term investments too.
- You are regularly skipping your utility payments because of cash crunch.
- Your income does not match up to your expenses. Even though you have not taken a loan, you are living off your assets. Well, during retirement, you actually live off your assets. So, this is not necessarily a problem. You have to see the applicability.
- Money is a problem.
Once you know the problem (susceptibility, to debt problems, minor debt troubles or a full blown debt crisis), you can take corrective or proactive steps. The only possible actions to get out of debt trap are:
- Increase income
- Reduce expenses
- Reduce debt
- Reduce the cost of debt
There is no other way. Ingenuity is not bad but be rest assured, that won’t help in this case.
What would you do? Look for some of these tell-tale signs. You can’t take steps to solve a problem unless you appreciate there is a problem. Take proactive steps or correction action.