One-year of COVID-19: Five steps to get out of that debt trap

As we complete one year with the pandemic, here are money lessons to be learnt from a real-life case

March 01, 2021 / 11:03 AM IST

It is close to a year since the COVID-19 pandemic struck. The world as we knew it changed, perhaps forever, and many of us braced ourselves for the worst economic challenges. One of my clients, Sahil (name changed), 36, was living his life to the full. Sahil was highly educated and had a good job. It was just that he spent excessively. Like many others, he and his family of four were caught on the wrong foot due while facing the economic impact of the pandemic. It led him into a debt trap. Let’s see where he went wrong and what our readers can learn from his and his family’s mistakes.

Leading a good life

Sahil is a software engineer. He works in a multinational Company. His monthly salary, at the moment, is about Rs 1.75 lakh. He was transferred to Mumbai a couple of years ago by his company. Prior to that, he was based in Hyderabad and used to live with his parents. Along with Sahil, his wife Shivani, 34, and their daughter Shreya, four, also moved to Mumbai. Shivani is a homemaker. After shifting to Mumbai, they had bought a lavish three bedroom-hall-kitchen (BHK) apartment in the suburbs, which cost them around Rs 1.75 crore. Since Sahil had taken a home loan, he had to pay a equated monthly instalment (EMI) of Rs 1 lakh.

Sahil was barely able to make his EMI payments. He and Shivani were impulsive shoppers – Sahil was fond of new technology gadgets, whereas Shivani went on a shopping spree every weekend. Sahil had about four credit cards, which he used recklessly.

Last year, when the pandemic hit everyone hard, Sahil, too, faced a pay cut. He barely managed pay his home Loan EMI. But the credit

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card dues were unpaid and the interest kept piling up. That burnt a big hole in his pocket. And predictably, his credit score got badly impacted.

Credit cards are surely useful, but when used carelessly they can be dangerous for your finances. It’s pretty common: many fail to pay their credit card debt each month and suffer financial consequences.

How can Sahil get out of this debt dungeon? Every individual faces financial problems and challenges at some point of time, which is indeed stressful. But finding a way to overcome the unfortunate situation is the real challenge.

Identify the underlying problem

The first step in overcoming financial problems is to identify the underlying issue that is causing the difficulties. In Sahil’s case, the problem was not the cut in salary. So, what was the problem? Too much debt. First the home loan and then the large credit card dues.

Sahil was trapped due to his current lifestyle.

Prioritise your spending choices

It's okay to spend. But prioritise what you need (basic) and what you aspire to have (expensive lifestyle). Sahil and Shivani should have cut down their expenses on new gadgets and fancy clothes for a while.

And live within your means. It’s always best to be a bit conservative when it comes to money management. Try and avoid spending as much as your credit card allows you to.

Create a budget

Make a budget and stick to it. That’s the best way of balancing your income and expenses. Automatically – over time – you will see how much money you can then save and invest.

Making minimal use of credit cards

Credit cards can easily lead you to a debt trap since it is the costliest. High interest rates will hurt your future finances. Thus, make sure that you don’t sit on a pile of debt by using credit cards for unwanted things!

Save and invest

Keep your investments going every month. Don’t just set aside some money. Invest it. Let your money work for you. And keep reviewing your investments.

It’s not easy to control your splurging habits if you’re used to spending high sums. But a turnaround in your financial approach is doable. The sooner you do it, the better.
Tejal Gandhi is the CEO and Founder of Money Matters, India
first published: Mar 1, 2021 11:03 am

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