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Use Debt as Crop not as a Trap

by Eis Investm on Wednesday, March 9, 2011 at 7:39pm

Borrowing has become indispensable these days. People borrow either to create assets that would result into bumper crop or to spend on impulsive purchasing that would lend them into a trap. Every planned borrowing, to create some appreciating asset, is welcome and improves health of wealth. On the other hand, every borrowing to satisfy our passions and temptations leads to deteriorating health of wealth. It means depending upon utilization the same debt may prove fruitful or harmful.

From individual’s point of view housing loan is the only productive loan. In similar way, life saving loans for critical illness or accidental hospitalization is necessity. Any other loan which does not increase earning potential is a serious problem and may severely harm health of existing or futuristic wealth.

We must avoid accumulating debt at any cost. Wayward spending habit leads into a debt trap and it is very difficult to come out of debt trap. It takes a lot of time to repay debts and during this period one may miss big opportunities. Prevention is always better than cure. One must avoid falling into a debt trap. Any default on re-payment results into dent in credit worthiness. As a professional, one must respect and protect his credit worthiness at all cost. Some of the tips are reproduced herein for the benefit of one and all:-

CLEAR OFF THE DUES ON OR BEFORE THE DUE DATE

One of the modern way to fall into debt trap is to accumulate credit via credit cards. Initially, people fail to understand a credit card statement. Minimum amount due is usually misinterpreted and people think that they have to pay just 5% of the due amount and they do not realize that the company charges very high interest on the remaining amount. Not only interest they charge in more than one ways. One should care-fully clear off the dues before the due date that also in a way that payment reaches the card provider before due date. Lure of multiple credit cards is very dangerous and surest way to fall into debt trap.

CHANGE THE MIND SET

Gone are the days when loan taking was social taboo. Modern mantra is: ‘consume first and pay later’. While following this theory, one must take care of unplanned expenditure in foreseeable future, such as illness, accident, loss of job, no increment, family expansion, casualty in family, social expenditure in the form of marriage, etc. Take care. There is need to change the mindset. The mantra needs to be re-written: ‘Consume first but not very fast’ or ‘Consume only surplus in-come not full future income’ or ‘Consume first and pay faster’. While taking the loans, one should be very careful of the jargons such as flat or last payment first or foreclosure pen-alty and so on.

LIMITED EMIs

Periodicity of loan should be restricted to minimum possible. Multiple consumer loans shall be avoided at all costs. Long term loans or multiple loans are not very wise decision. Recession in the econ-omy or physical / mental incapacitation can result into a salary cut which may upset repayment capabilities. Interest on interest shall be treated as dragon. Ideally EMIs shall be restricted to 70% of the surplus income and rest 30% of the surplus income shall be left for un-planned expenditure.

SHORT TERM PLANS

One must have short term financial plans also along with long term plans. Long term plans like plans for daughter’s marriage, old age pension, retire-ment planning are incomplete unless aligned with short term planning like further studies, dream vacations, housing and vehicle needs. Saving shall be properly invested. Systematic investment plans are must for each one of us.

AVOID IMPULSIVE PURCHASES

Most expert’s feel that one should not borrow at all. One should wait a little longer to fund the purchase rather then to opt for a loan. Though it is very hard to wait for own funds but it is a very wise decision to buy anything by own funds. Impulsive purchases are often identified as the main reason behind debt traps.

FINANCIAL ANALYSIS

Before opting for another loan one must analyze financial aspects. There are two ratios which show the financial strength of a person. First - EMI to Income ratio; and Second - asset to liability ratio. Both the ratios are inversely related to each other. More EMI means more liability and less EMI means less liability. One must focus on increasing income on one side and assets on another side. Depreciating assets to appreciating assets ratio is another important tool for analyzing financial strength of any individual.

Take care, don’t fall into debt trap. Take care of unplanned expenditure that also through your income not through fresh debt. Take debt but only to add on appreciating assets not for depreciating assets. Invest your saving wisely. Rather suggest your friends also to invest wisely.

Happy Investing !!!!

Investment Cause

Dear Members,

Wish you all Happy Mahashivratri.

Yesterday was the day which saw 200 points rally on Nifty and around 600 points rally on Sensex marking it second biggest run in last two years. The trigger for such a run on the bourses was huge short covering by FIIs and DIIs due to good budget. As there was no bad news in the budget, operators were forced to cover their shorts which they created prior to budget expecting deep cut in the market after budget.

FIIs and DIIs have always created panic on the street and I have been advising you all to Invest in the market systematically for last two to three months. The "investment returns" which if made on declines tend to give you decent returns over a longer period of time. So keep on investing in this market which is called Smart Investment. Contrarion approach to investment is sometimes risky but will always give you higher returns in comparision to other form of investment in Stock Market. Risk is always rewarding in stock market if it is taken in calculated way. People usually can't control their greed which always translate into losses in the market.

Keep investing and start early in your life if you want to become wealthy, age of investment always plays a important role in your Investment goal. Always bear in mind drops only make ocean. So keep investing...

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