To avoid falling into the debt trap, you need to learn to prioritise your expenses. Before you make any big purchases, ask yourself if it’s really necessary or even high on your priority list. Spending too much on luxury items can make you fall into the trap. This can be done through budgeting and priority setting.
Divide your spending into Necessities, Semi-Necessities, and Unnecessaries
To avoid debt traps, it is necessary to divide your spending into three categories: needs and wants. Necessities include food, housing, and transportation. Wants, on the other hand, include entertainment and gifts. Ideally, you should have at least 30% of your income dedicated to needs.
You should consider what you really need before you spend money on wants. For example, your rent or mortgage payment, utilities, and clothing are necessities. Healthcare is also a necessity. Many young people avoid health insurance or buy an inexpensive policy, but it is imperative for you to have a plan. You also should consider going out to eat or buying prepared meals.
Your fixed expenses should be allocated a certain value, while your variable expenses are subject to change. To estimate your fixed expenses, look at the last two or three months’ bank or credit card transactions. Once you’ve categorized your expenses, you can determine what your monthly income is.
Prioritize your spending
The best way to avoid the debt trap is to plan your expenses carefully. Prioritize your daily expenses and decide how much you will spend on debt each month. Whenever you make a purchase, ask yourself if it’s essential or high on your priority list. It can be easy to fall into a debt trap when you spend money on things you don’t need. You can also create a budget and use it to manage your spending.
It’s crucial to recognize the warning signs that you’re about to fall into a debt trap. These include bills that are due, living on the edge of your income, and no savings. If you notice any of these things in your life, it’s time to change your spending habits. The sooner you start changing your habits, the better.
Consolidate your debts
Debt consolidation sounds like a good solution for people who are drowning in credit card debt, but there are a few things to keep in mind before you begin the process. First, it’s important to know that debt consolidation only works if you have a lot of debt. If you only have a small amount of debt, it’s not worth the fees and credit check, so it’s best to avoid it. Also, don’t consolidate your debts until you’ve evaluated your spending habits and financial situation.
Secondly, if you are considering debt consolidation, be aware that the interest rate will probably go up. This is because the consolidation lender will want assurances that you’ll pay it back, and they will probably run a credit check. In some cases, they may also require collateral. If you have good credit, you can use your home as collateral.
Avoid debt traps
Avoiding debt traps is not always easy. You need to be aware of the different types of financial traps and how to avoid them. It is vital to stay out of these traps, as they can lead to major financial difficulties. Borrowing money has two elements: the principal loan amount and the interest charged by the lender.
In the age of instant gratification, it is easy to get caught in impulsive spending. Impulsive spending often leads to debt traps. This can happen when we want a bigger home or a new car. Think twice before spending on impulse, and prioritize your needs and wants. Keeping a tight financial rein on your spending can help you avoid falling into debt traps.
Avoid debt-trap diplomacy
Debt-trap diplomacy involves a creditor country extending too much credit to a borrowing nation to gain political leverage and extract concessions. The borrower country is unable to repay the loans and is forced to pay for contractor services and materials sourced in the creditor country. The practice has been noted in China.
Debt-trap diplomacy has been blamed for the growing burden of debt in many low-income countries. Some critics argue that China is engaged in debt-trap diplomacy by lending money to nations such as Sri Lanka. In 2007, the Chinese government made loans to Colombo to build Hambantota Port in Sri Lanka. However, China knew that Colombo would be deeply in debt. This meant that Beijing could seize the project and allow the Chinese navy to use it.
Debt-trap diplomacy can be a dangerous practice, but it is important to avoid it. Developing countries should carefully consider the terms of the loans they take from China. Unless they are able to recoup the loans, they will eventually find themselves in a precarious position and may lose their sovereignty.