As we get older, our financial affairs become more and more complex and unless we’re very careful about managing finances, we all have debts in one form or another. One of the secrets to maintaining financial stability and building your savings is to avoid common debt traps.
It’s important to note that not all loans are bad. If a loan is used to create productive assets, then it definitely is a good move to make. However, there are bad loans too. In the list below, we’ll help you avoid some installment loan debt traps.
1. Dream home loan
Homeownership is the great American dream. Who doesn’t want to own the place they live in? It feels good to have a property and in buying a house, many people also see an investment being made as they hope the house will increase in value over time.
However, some property buyers get carried away with their dreams and they don’t really consider the reality of taking out a big loan. To have their dream home, they may borrow an amount that seems to be within their means to repay.
However, they forgot to plan for changing circumstances, such as loss of income or increasing rates and soon find themselves in a situation they can’t handle. So it’s really important to plan ahead of time and make sure you can handle the loan you’re borrowing.
There are times when you just want to take a chance or seize the moment. Your kids need new laptops for school, your car is old and broken and you need a new one or you may want to invest in an opportunity which sounds too good to miss, the list is endless. One thing is for sure, you need the money that you don’t have at the moment.
Taking out an installment loan may seem like a good idea at that point in time. If you find yourself in a situation such as wanting to take a chance on that awesome investment idea, stop and let it sink for a few days before taking action. This ‘pause button’ can save you from a lot of trouble if you were to borrow money you can’t repay. So think carefully before you spend and make sure you have enough money to pay back the debt.
2. Use the 4321 formula
Your loans should not exceed 40% of your income. Expenses should not exceed 30% of your income and you should save around 20% of your income for long-term financial goals such as marriage or retirement planning. You should also save around 10% of your income for insurance coverage for yourself and loved ones.
3. Identify your needs and wants
If you’re planning to take out a new installment loan, you should only take out the amount you really need, such as a home loan or buying an asset.
When you take out a loan to increase your assets, you are borrowing wisely and planting seeds for future success and financial stability.
Avoid loans for luxury expenses, vacations and other wants as you’re really better off without the flippant spending.
It’s up to you
By following the suggestions above, you can get rid of some bad spending habits and avoid debt traps.