Financial Freedom: 7 Steps To Get Out Of The Debt Trap
While financial freedom is an aspiration in everybody’s life, the ways to accomplish things are not that easy. It doesn’t mean you should be absolutely debt free, in fact, that would not be a smart policy at all. On the contrary, it is advisable to take loans to give yourself a financial leverage. At the same time, you should be careful that you don’t step into the debt trap. But paying off debt smartly can get you out it.
What is financial freedom?
It has a multi dimensional definition. The Wikipedia definition says that a person would achieve the financial freedom if their assets generate income and/or cash flow from dipping into the assets that are at least as great as their expenses.
To understand financial freedom either you can see it from assets perspective or liabilities perspective. In other words, financial freedom comes not only with an increase in income but with paying off debt too.
The Debt Trap
With the globalisation and renaissance in the information technology sector, people are finding it much easier to materialise their wish lists. The financial constraints can somehow be overcome with owned as well as borrowed funds. In fact, banks and financers are proactively taking part in dispatching loans to its customers to meet their various demands. Acquiring credit cards now has become not only easier, lucrative deals and discounts on credit card purchases are the icings on the cake. As a whole, the situations have been orchestrated in such a way that you have limited routes of escape from such fascinating offers. But the matter of concern is our consumerism has reached such a height that we don’t even judge the necessity of taking a loan even for our smallest needs. Paying off debt is equally important, which we overlook and gradually we indulge ourselves in a great debt trap.
Judge Between Good Debt And Bad Debt
You must discriminate which is a bad debt and which is a good debt. For the ease of understanding, debts may be classified into two parts revenue generating debts and non-revenue generating debts. Revenue generating debts mean loan taken for purchasing such an asset which will generate revenue for you for a long time. They may also be treated as good debts. Next, a non-revenue generating debt means a loan taken for an asset which does not generate any revenue on a long term basis. These are bad debt.
Paying off debt: Ways To Get Out of Debt Trap
As we know taking loans are becoming easier than ever before, but getting out of its debt trap is equally difficult. As a result, people break down out of the stress of debt. This article will help them to get out of the clutches of bad loans by following a few simple but effective steps.
Step 1: Identifying Problem
Find out your problem. Only you have to analyse your problem yourself. You have to find the areas of concern and identify the things which are in your control and which are not. Accordingly, make a plan or re-plan to satisfy your debt amounts. Prepare a fresh repayment schedule and also the means which you can utilise for the purpose. At the same time, you need to address those financial factors or areas concerning you, required special attention and improvements. With this step, you are not only acknowledging your current problem but will have a clear vision for the future. Always remember that the more detailed and fair analysis you do for your debt problems, the closer you will be to their solution.
Also Read: 10 Super Tips For Living On A Single Income
Step 2: Prioritisation
After a thorough analysis in step 1, you will be in a position to identify what are essential, what are semi-essential and what are non-essential items in your financial life. This segregation is important for your prioritisation. If you are in a debt trap, immediately stop buying non-essential things. It may impact your luxury level but you can survive without them. Semi essential items such things which are not as essential as to survive, but adds to your comfort level. Try to curtail them if possible or find some alternatives which are cheaper to the existing one. You should remember that paying off debt is your priority and the sacrifice you do in this step has a long ranging effect on your financial solvency.
Step 3: Change Yourself
Make some behavioural changes to achieve small cost reductions. If you are buried under loans, this step is crucial to get you out of it. A change in your daily habit has a long lasting effect in curtailing your monthly expenditures. For example, if you are a frequent restaurant goer change your habit of making foods at home. This will not only save your money in terms of food expenses but in terms of health issues too. You cannot expect a drastic change overnight, but in the long run, you will realise that you have saved a lot. For best results, you can prepare monthly expenditure plan and calculate what extra amount you have saved by changing your habit.
Step 4: Create Emergency Fund
Create an emergency fund out of the money saved in step 3. Set up a target that you have to reach within a specified period. On reaching the target level set a new level with a higher amount. After a few sessions saving money will become a habit for you. The purpose of creating such a fund is to utilise the same for the repayment of the loan in case of any uncertain eventuality or expenditure that made deter you from repaying your loan instalments. You can create such a fund either in your bank or at your home. For small savings maintaining a piggy bank is always helpful as you can deposit your savings whenever you want.
Step 5: Pay Bills On Time
Try to pay your bills on time. If you are debt laden, never procrastinate in paying your regular bills. Because taking new credit on your regular expenditure lists in addition to the older ones is nothing but suicidal. Moreover, discounts and rebates which are offered on regular and timely payments will not be available for credit taking customers. On the contrary, additional fines are penalties are imposed on delayed payments.
Step 6: Expand Your Income
Go for passive income. Passive incomes are those that you earn in addition to your regular income with or without taking part actively in the earning process. The sources of such income can be anything, be it renting out your extra room to paying guests or writing blogs as a freelancer for various sites. Earnings through online jobs are good sources of income. These incomes prove to be of great support especially when your life is sandwiched in between daily expenses and debts. Expanding your income base eventually helps you in repaying your debts faster.
Step 7: Make Extra Repayment
The previous steps you will find that the ultimate goal is to save money either by curtailing expenditures or by earning extra money. The prime motto behind such a saving is to repay some extra amount than what you usually do against your loans. This way you can repay your debt much before the schedule ends. This step gives you two benefits, first, you can make yourself free of debts much before the time anticipated and secondly, you have to spend a lesser amount of money in terms of interest expenses.
If you follow the steps consistently and continually, you will have the least problem in paying off debt and you will certainly regain your financial freedom. Keep track of your progress regularly and note down your incomes and expenses on daily basis. Evaluate your progress from time to time preferably on monthly basis. This will tell you how have you fared in managing your debts and what are the deficiencies you need to improve.
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