Debt Management

It is even not easy to just imagine buying a home without taking a home loan. Now a days it is common to come across that one's significant part of their earnings goes towards a home loan repayment. They are able to build an asset early in life through soft credit and reapaying the same in the long run, yet enjoy the asset right away. On the other hand, one can also come across defaulters who are chased by the collection agents to settle their dues on loans taken for varied purposes. To make the most of the debt it is important to understand the value of it and acts in a discplined manner.

 Eventhough one can make the most of the debt by using the same smartly, it does not come free and there is a cost associated with it. Changing demographics has led to a shift from save and buy to borrrow and buy. Debt can be differentiated as good and bad debt. For instance home loan to buy a house is a good debt. However, a loan for revolving credit on the credit card is undoubtedly bad debt. In fact, such debt gets one into a debt trap that can go on into the endless cycle. Moreover, good debt is relatively low interest bearing and usually it is raised to acquire productive long live assets also good debt got the potential of capital appreciation and income generation in the long run. In contrast, bad debt is consumption led and is mostly used to obtain assets that goes down in value and does not build any form of physical asset. For instance a car purchased through loan is only a fraction of that loan by the time it is completely paid for.

 The good debt can produce cash flows over time and be tax effecient whereas the bad debt consume resources leading one's towards debt trap. So its important to to know what exactly a debt trap cycle is. A debt cycle starts with expenses exceeding income, which results in shortage of cash. Then one starts getting into borrowing cycle to bridge the gap with the existing loan. The real worry starts probably having no end to the same. The prime reason for mounting debt is the interest component. The interest never stops as long as the loan repayment is on. Those who have come out of a debt travel will endorse the view that interest is a friend who is worse than the worst enemy that one can come across.

 One should understand that addressing the debt problem should not merely be seen as a legal obligation but also one's moral responsibility to repay the same. There are few strategies that can work in reducing and clearing the debt if it is implemented sincerley. Cutting unnecessary expenses to meet the current debt obligations, developing the personal budget to make a assessment of how much money one can bring in and how much money can be spent. The objective is to manage and keep an eye on spendng patterns, identifying necessities, prioritizing wants and trimming down discretionary expenses. There is no doubt assets can be built with the help of debt,  provided if the same is used prudently, at the same time it can also lead us into the debt trap which is a new friend worse than the worst enemy one can come across in life.