Are you a Superman when it comes to handling debt or a do you find yourself at sea? In a relatively easy credit environment, some people see their personal debt spinning out of control.
But without a warning system, how can one be sure that the line has been crossed? Financial Chronicle talks to experts for highlighting key factors one should keep in mind so as to know when to stop taking debt.
Control: Personal finance experts say that the healthiest individuals are in control on their discretionary spending and debt. When you have control over what you charge or borrow, it will mean you are setting aside debts over which you have little short-term control, such as home mortgages and car loans.
“But the big picture should not be forgotten. The ideal way will be to adjust expenses so that you spend less if you are taking more debt,” said Anil Rego, CEO, Right Horizons. When you have a disciplined way of monitoring debt repayments, it’s harder to slide into a situation where you are in mess. Your ability to carry debt depends on your career prospects, savings, investments and back-up cash.
Factors: Okay, but how do you measure whether debt is too much? Recognise that your debt should be in proportion to three important financial resources — savings, job and income —after paying off your existing debts.
“Unless you are above 60 years of age, you will be exposed to debt doldrums. Home loans are big in absolute number, but a bank checks everything before giving a loan. It’s the small credit card debt that slowly gets out of hand. As a thumb-rule, don’t take small loans that are more than your rainy-day liquidity resources. It could vary between three to nine months of your monthly expenses, but that is the solid cash that you have,” said Gaurav Mashruwala, a personal finance expert. Cutting debt is a good solution, but the better alternative is to take reasonable amount of debt, he added.
Repayment: All said and done, its important to determine the discretionary income you can allocate to pay off debt. Sit down with a typical month’s worth of income and spending pattern. This will tell you your discretionary income. For instance, Rs 60,000 salary will be reduced to a discretionary income of Rs 25,000 if one spends Rs 35,000 per month on household related reasons.
“For this purpose, do not count current debt payments (except for mortgage and auto) in the expenses. Please keep in mind that you should count amounts that you send to credit card companies or payments for consumer loans. But calculate all necessary living expenses, such as rent, home loan, food, clothing, education and other utilities,” said Sanjay Das, a Kolkata-based financial planner.
If you are married, Das added that it will be good for both to separately evaluate individual expenses.
While it’s not important to monitor discretionary income (after necessary expenses) for more than a couple of months, over time this habit will immediately throw up warning signals whenever the tendency to splurge exceeds reasonable limits.
source: www.mydigitalfc.com
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