Do you think you are stuck in a debt cycle that never ends? Maybe you just paid off your debts and again fell back into it after some time. That exactly is what a debt cycle is. To define it, you are said to be in a debt trap when the income you earn isn’t enough to pay your EMIs and thus the interest keeps accumulating along with the outstanding amount. Then you take new loans to clear off the current loans, without realising that your debt situation has gone out of your hands.
Once you are in this vicious circle or a debt trap, it only gets tougher until you plan and work towards getting out of it yourself. If ignored, your credit score falls, your savings deplete and your debts keep on growing to a humungous size. If you find yourself in such a situation, here are some steps that could help you get out of the debt trap:
Keep a tab on your total debt
Face your problem and keep adding up the total amount of debt that you have taken so far. Yes, it could be stressing to see these numbers at times but that would help you to realize the reality and then figure out ways to gain control of it.
Make and follow a budget
Not having a set budget to follow can throw your expenses out of control. Making and then following a budget can help you to take control of your expenses and overall financial situation; thus, stopping you from entering a vicious debt cycle.
Get rid of your debts
If you seriously want to get out of the debt cycle you are stuck in, the first step is to pay off your debt. Paying off your biggest debt would lessen your stress and increase your liquidity as you would have lesser EMIs to pay. Then, you would have more money in hand to plan your future.
Chalking out a vision board
Imagine having your expenses or financial goals displayed in front of your eyes? Wouldn’t it be nice to have a constant reminder so that you can work towards it?
So here are some ways in which you can make your financial goals in a visual format:
- Make a graphic illustration of your financial goals – it could be a chart, a checklist or anything else that you like.
- Keep an image or picture of your goal handy as that could be like a reminder to you. You can also make a vision board on Pinterest, or create a poster of all of the things that you could do after you pay off all the debts.
- Affirmations play a big role. How about writing your dreams and how your debt-free life would be for you?
Create an emergency fund
Have you thought of starting with an emergency fund for yourself? A vast majority of UAE residents have never had any emergency fund and those that do, only have enough to cover three months of contingency expenses. Creating an emergency fund can help you to get through any unexpected situations or tough times that come without an announcement. For instance, if you lose your job, or some unforeseen medical expense arises, then you would have something to fall back upon.
Spend lesser than you earn
Check if you are amongst those who live on one paycheck to another. This could be very detrimental as it could lead to higher credit card debts and you can end up paying high interest rates. Always make it a point to spend lesser than you earn. You should figure out ways to stick to your budget or increase your income.
Increase your savings
Find ways to save more money so that you can pay off your debts faster and improve your financial habits. This can mean cutting back on unnecessary expenditure, taking the public transportation, shopping during sale/discount season, and other steps, that can help you put aside a certain sum as savings.
Strive to earn extra
Increasing your income can change your life completely and in a positive way. Not only can you pay off your debts and come out of your debt cycle, but you can also think ahead and plan for the future with the extra finances, perhaps a better car, a bigger home, or new furnishing.