Financial freedom is something that every person wants to achieve, and through that, one can have a smooth and easy retirement. However, in the course of life, many individuals take on a pile of debt, which then becomes troublesome, as they have to pay it for a long time, and it gets tough for them to achieve financial freedom.
However, it’s something that can be mitigated, and through proper planning, one can get to the goal of financial freedom and enjoy a happy and secure retired life. In this blog, we will discuss the five steps one needs to follow to avoid a debt trap and prevent themselves from financial distress.
- Separating Good and Bad Debt
The debt is something that can be segregated between good and bad debts. One can take loans for a variety of purposes, and based on the loan portfolio, one can segregate. A good loan is something that is taken by a person to buy or invest in an asset-generating instrument.
A bad loan is used for consumption and spent on liabilities. For example, when a person takes a loan for a vacation, it is considered a bad loan. Whereas, when a person takes a loan to invest in a business, then for that individual, it’s an income-generating asset as it can pay off the debt and can further generate additional income, which will benefit the person by giving them financial freedom and a source of passive income.
- Identify the Reasons for the Debt Trap
Let’s consider an example where we can see a person’s situation and determine that person is in a financially distressful situation. For that individual, it’s quite tricky to understand the cause of the problem.
Therefore, it’s important to seek the advice of a wealth manager who can structure the debt and analyze the person’s financial situation so that they can start the process of debt repayment. To resolve a debt and avoid a debt trap, one needs to have a clear roadmap that will help the individual recover from the current predicament, take a closer look at the problem, and find a viable solution.
- Needs Must Be Prioritized
Now, when a person is doing financial planning for them, it’s essential to consider the fact that they need to create a budget and must spend under that to recover from the financially distressful situation.
Here, for example, a person who is in debt must not go for major financial expenditures, which can worsen the existing situation. Life events, such as marriage or other expenses, need to be halted for some time so that one can mitigate the risks and recover from that situation.
An individual in this stage also needs to look for cheaper alternatives and can try to find ways through which they can raise their income levels and pay off their debt. It is through the use of certain long-term planning which will have a positive effect when the person will retire.
- Changing Behavioural Habits
As consumers, we tend to develop certain behaviors for products and their usage. For example, a person who is subscribed to multiple OTTs needs to trim down that cost and ensure that they do not go overboard with that expenditure and follow the budget.
A person can keep a monthly budget plan and follow it to start savings, which can then be consolidated and used to foreclose a loan.
- Debt Consolidation
Debt consolidation is the process that allows a person to consolidate the total number of debts into a single account. One can do that with the help of a personal loan agent who can issue a new loan with better interest offers, and that will help a person to foreclose the other loan accounts. An individual only needs to pay for the final loan amount and can completely come out of the debt.
Bonus Tip: Develop an Emergency Fund
Apart from coming out of the debt trap, a person must start developing a parallel fund where they can insure themselves by creating an emergency fund, which will give the person a cushion in case of any unforeseen event. It will then prevent the person from taking a loan, which can start the debt spiral again.
Thus, following these tips, one can recover from the debt burden and can come out from a financially distressful situation.
