Do you find yourself in debt at the end of each month? 4 ways to avoid this situation

A social media user posted that although he earns good enough income, he ends up spending it all before the 20th of every month.

“I earn close to Rs 80,000 per month after all deductions. But even that is not enough for our family of three. We exhaust my salary between the 20th and 21st, then we resort to borrowing from friends and family and sometimes taking out small loans as well. I don’t understand why this is happening to us, when we live modestly,” he said.

While commenting on this post, many other social media users also said that they too faced the same issue and ended up with a significant amount of debt trying to make up the shortfall.

But going into debt can create other problems. Bhuvanaa Shreeram, co-founder and head of financial planning at House of Alpha, a financial advisory firm, says this is a dangerous path to take. Even though people claim to pay off their credit card and other loans on time, all it takes is a month to be wrong and the damage begins.

Shreeram said that’s because when the income comes in next month, most of it goes to repaying the loan, which upsets that month’s budget. More loans are taken out to fill the gap. “People’s creditworthiness takes a hit, so they are forced to take out more and more expensive loans,” she says.

Here are four ways that can help you learn to live with your salary and not end up in a situation like the one mentioned above.

Create a custom budget

You should strive to create a budget that adapts to your lifestyle needs and obligations, then takes the variables into account.

Abhishek Dev, co-founder and CEO of Epsilon Money Mart, a Mumbai-based financial services company, advises people to start maintaining a simple financial plan for their family. First, create a balance sheet with income and expenses, then estimate your expenses on an ongoing basis.

“We should divide our expenses into necessities; good to own and long term aspirations. Necessities cannot be compromised, so they must be met immediately,” Dev added.

“Then we need to estimate our revenue and expected revenue growth and estimate the type of investments we need to make to achieve them through our own investments instead of loans,” Dev added.

Reduce unnecessary expenses

A social media user commented on the same post that he had about 7 OTT subscriptions, and most days he barely had time to watch about 2 or 3.

Shreeram informs people that this is one of the first steps, ie identifying that there is a problem. Once the problem is identified, people need to take responsibility for it and commit to solving it.

You need to go through your bank statement to find out more about those hidden expenses such as OTT subscriptions, music subscriptions, game subscriptions or other recurring expenses that you thought you were using at some point but are not using more. It’s not worth spending extra money on these things if your life priorities have already changed.

Measure your means

There is a phenomenon called “lifestyle slippage” in which as your income increases, your lifestyle expenses increase.

For example, students may be happy enough to eat with friends at a local joint, but once they start working they may want to go to fancy restaurants.

If you can’t afford a certain lifestyle, you risk going into debt.

Engage in goal-based investing and pay off small debts

Shreeram says people in such situations should create a time-limited debt repayment plan to settle small debts first.

Dev says people should create an emergency fund that can support our needs for at least 6 months, and after creating this pool of funds, people should plan goal-based investments in order of their priorities.

Shreeram advises that it’s essential that people define their goals early on and have a clear mindset about why that goal is important. “Make and diligently follow a budget and ensure that there is a surplus of income over expenses. Create a basic emergency fund and decide not to touch it unless there is a life or death situation,” adds Shreeram.

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