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Cool Ways to Manage Debt to Avoid Debt Trap

Posted By On 6/03/2009 07:09:00 PM Under ,

It is very improtant that one understand the implications of debt failing which one can fall in the debt trap and a few methods listed below here will enable one to manage debt with dignity.
(a) One should get out of the guilt feeling that he or she is in debt as debt is a cool medium to grow assets.
(b) One must determine the limits for borrowings; because if one is over burdened with debt than one can develop stress related problems.
(c) When borrowing, keep in mind a 50:25:25 ratio (monthly expenses, savings and debt) ratio of your income. As an example one should not let go EMI overshoot by 25% of net salary in case of a child education and it can be extended to an extent upto 40% of net salary in case one is going for a home loan as an asset is being build.
(d) One should have 12 months salary in bank to cater for any unforeseen eventuality.
(e) Identify your liquid assets. Work out their value at 50% of their original value as a rough check of your liquid finances.
(f) If interest rate is high than negotiate the lending terms with the lender. They may be happy to extend your loan repayment period to avoid the default.
(e) Haggle rate of interest while taking the loan as customer is King.
(f) Definitely take a house insurance cover.
(g) You must be insured for 50 times your monthly pay.

2. Last but not least one should work out the current ratio which is Liquid cash in hand divided by the loan amount and preferably keep this ratio below one which indicates that one is in a comfortable position.: It is important that adequate liquid assets are available to repay one’s debt. This ratio indicates how many times your liquid assets cover your short-term debt. If the current ratio is above one, it is considered good. Assume your liquid assets are Rs 3 lakh and your debt (not taking mortgages) is Rs 2.9 lakh; that a comfortable position.

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