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How to Clear Debt and Maintain Financial Stability?

Understanding the different kinds of expenses

For most of us who earn a salary, the first thing we do when we get our monthly paychecks is to use that money to pay our bills and our essentials. Our bills can be things like our monthly rent, monthly loan payments, the utility charges for our houses, internet and mobile fees, groceries, clothes and maintenance costs. All of these expenses are the cost of living and no matter what the situation, these costs are here to stay. If at any point you fail to pay for the cost of living, then you can be in deep trouble.

In addition to this, there are some other additional costs. These other expenses can be things like dinners with friends and family, gifts and a variety of other things. This secondary expenditure is something we can choose to avoid. But we spend money on these kinds of expenses because they make us happy and keep us connected with the people around us.

In an ideal situation, once you are done paying for your primary expenses there’s a little bit of money left over. This money can be used to go out for dinner, gift your parents a present and, save for a rainy day. And, if you are planning ahead, there is always life insurance to safeguard your future. To begin on the latter, you can learn about life insurance for dummies.

What is a debt trap and what does it look like?

However, if you’ve borrowed a lot of money from banks then most of your salary goes towards making your monthly loan payments and clearing your debt. If managed well this money can be brought from your savings or you can decrease other forms of your secondary expenditure. For example, putting off a new phone purchase or avoiding a couple of nights out with friends.

The real problem begins when your loan payments are so high that they force you to expend all your spare money on them. This kind of burden slaughters your financial freedom, and this is why clearing debt early is necessary for financial health.

Being caught in a debt trap is no joke. In the past few years, banks and other financial institutions have pushed ‘easily available home loans’ and ‘hassle-free easy credit cards’. Due to this easily available money more and more people are going into debt. Over a period of a few months, they realize that they can’t afford to clear their debts and this makes the entire narrative concerning.

Positives of going into debt and the reasons why people do it

At first, glance, when we think of debt, we already have developed a negative bias towards it. This bias probably comes from the fact that right from the time we are children, owing someone money wasn’t looked at as a positive thing. Many people have had bad experiences throughout their life when trying to get the most out of their opportunities. But the chances are that without proper education, most of them will end up in problems. It is good for your finances to carry a good debt, and in this case, the best adviser you might ally with is a debt lawyer. However, being able to borrow money is important, because:

1. Borrowing money gives you the chance to have the life you choose:
This is because a lot of the good things that we have like a home or a car isn’t something that we can pay for wholly in cash. We each get a fixed salary every month and it is unrealistic to expect someone to save 300,000 pounds to pay for their dream home.

2. Interest rates are not always very high:
Banks give us the ability to spend money with the promise that we will return it as well as the interest over time. This financial tool is what most people use to pay for their big expenses.

3. Taking a loan allows you to invest in yourself:
Most of us do not have a lot of money available at any given point in time and borrowing money gives us the ability to invest in ourselves. If you have a dream project or an idea that no one else wants to help you with borrowing money from a bank still makes it possible. However, it is just as important that you clear that debt on time as well.

Negatives of going into debt and its consequences

Being stuck in debt restricts your ability to spend money. The effects of being in debt are far more than financial. This pressure can damage other important facets like your ability to work freely, your health –both mental and physical and your personal relationships. Here are some of the ill-effects of going into debt and clearing debt:

1. Less free income:

When you’re in debt, you’ll realise that the hours you work will be getting longer and longer but the money you take home will not increase. Being forced to clear your debt makes you restrict your style of living. This has a big effect on some people, especially if they are the outgoing crowd.

2. More Risk:
When in debt, you’ll realize that your financial health is automatically exposed to more risk. Being in debt means that you have less emergency savings and fewer savings overall. A single job loss or a medical condition that insurance doesn’t cover could see you and those who love you spiral into a debt trap. Hence you should clear your debt as soon as you can.

3. Poor Mental Health:
With debt comes the added baggage of having to make monthly payments. This can have an adverse effect on your mental and physical health. Sometimes the effect can be significant that medical attention is required. In order to live a healthy and less hospital prone life clearing debt is important.

4. Damages your credit score:
When you take a loan out from a bank or perform a credit check there is automatically a reduction in your credit score. When clearing debt you are at the risk of missing some payments or making a late payment. All of these shortcomings can result in your credit score tanking. To reduce the risk your credit score faces it is better to clear your debt as soon as possible.

5. You cannot afford to retire early:
Needing to clear debt means that you will not be able to add to your retirement savings for a longer period. People who go into debt tend to have to work for a longer time and hence retire on later in their careers. Clearing debt is hence essential if you want to retire early.

To Conclude
It is actually great that banks allow people to borrow money. Loans are one of the most important ways for people to get ahead and there is nothing wrong with going into debt. Debt becomes a problem if people aren’t able to make ends meet after their monthly loan payments. Hence, it is paramount that you clear your debt as soon as possible.