Investments once planned thoughtfully turn into debt. This is a strange cycle of life, but this happens. When your earnings drop you become a victim of certain situations which inhibits you to pay your dues which were otherwise the building blocks of your assets.
Understanding how investment in asset building turns into debt
An example is here. Let’s say, a house is an asset, and when you invest in a house, you invest in making a property. However, you don’t invest all the money you have for the house’s price payment, or rather you may not have the full price of the house with you in liquid cash to pay. You then simply mortgage the house to ensure that you own it by the time you clear the loan. This gives you the lump sum money to pay for the house to register the property under your name, while it stays hypothecated to the lender, till the time you clear off the borrowed money, in easy installments, through the tenure of few years.
If your plan goes right, and you keep on paying the installments towards the mortgage in time, then one day you will clear off the dues, and the house will be completely your own and will be your property on which you invested once systematically. With time and maintenance if you can build it into a wealthier asset that’s your creativity and planning. Even if you don’t invest anymore, the debt you took once backed up your investment at that time and helped you settle slowly with the property, while you took planned steps to clear the dues.
Similarly, you may also invest in a piece of land, or invest in cars, and they would all become your assets. And the process applied by the average person to make investments to make them assets generally goes through the path of mortgaging the asset first, or through taking a loan by using some collateral, to arrange funds for the payment. The game changes than when the plan backfires, and you cannot continue paying the loan EMIs.
It may be a loss of job, fall in business, a sudden financial crisis induced by a natural calamity, war situation, a sudden rise in monthly expenses, or some other crises of life. There may be a variety of reasons for your income to fall. Andit’s then that you realize the pressure of debt can be so painful to make life a punishment until you sort things.
How to make smart investments?
If you want to avoid any similar scenario described above, then you must plan things with extra caution and care from the beginning. Smart investments are those which are done with planning so that you can avoid much of the hassles. If you are planning to take a loan to invest in a property, then here are some things you can do for a better investment decision:
- Evaluate your earnings, and see how much you are earning now, and how much you will be earning in the next 10 or 20 years. If you are salaried, then factors like a yearly appraisal of salary, job changes, recession trends, all must be considered. And if you are self-employed, then you will have to see the future of the market you deal in and anticipate earnings in the future accordingly.
- Sketching a monthly budget is important. Not just a budget for the current month and year, but also for the months to come in the next 20 years. You must have a clear expectation and understanding of where you will be standing in the next 10 or 20 years, and how your month’s earning will be spent. Accordingly, you will know how much money you can comfortably shell out each month to pay for the EMI of the loan.
- Find out how the loan EMIs would fit into your monthly expenses. If you believe that you can manage comfortably without taking the stress, and after paying the EMI, you will still have enough money for other sudden expenses, then you should go for this.
- Savingsshould not stop at all because you are taking the loan for property building.In fact, even before paying the loan EMI, and meeting other monthly expenses, you must give the first priority to savings. When you see that after saving and meeting expenses you have money to pay the EMI, then only you may go for this. Sometimes you may compromise savings a little for this, but not a huge percentage of the savings should get reduced for debt payments.
- You must also build an emergency fund equivalent to the monthly earnings of 3 to 6 months so that in any crunch survival does not become a problem, and you get in hand the few months to arrange an alternative earning. And don’t forget to include the EMI of the loan for those few months in that fund too.
These steps can actually help you stay out of debt related problems in the future. Still, in case you get into unavoidable situations and start getting creditor calls for recovery, reminders and all, you can then fight debt methodically by studying debt management from helpful resources.
Debt can be fought systematically when you know the steps. And difficult situations when you cannot repay the debt should be analyzed as quickly as possible so that you can fight and arrange a solution. The worst problem you face due to debt is your reputation in the market as the creditor gets spoilt. Your credit history starts reflecting the missed payments or irregular payments, and your credit rating gets lowered. Hence in future, you do not qualify as a good money borrower whom lenders would select for giving loans. Besides, more problems do comeon when you get legal notices, constant recovery calls, etc.
Debt settlement and debt consolidation are two options which the common man can take up as per situation, to get out of debt. Both work well in their own ways, but both come with their own pros andcons. Hence, you need to study them well and apply as per your situation to get out of debt before it’s too late.