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Indians are borrowing more. Not only has the number of borrowers increased over the past decade, the ticket sizes of loans have also shot up. Millennial borrowers are financing their lifestyle spending by taking short-term loans and swiping their credit cards at will. With the advent of easy loans offered by digital lending platforms, this trend has seen a further spike. But there is a darker side to watch out for because the more one borrows; the deeper they can sink into a debt trap.
A recent research report shows that there is a 55 % surge in personal loans for travel purposes with 85% of the borrowers being millennials. It will be interesting to find out the driving force for this trend.
Chalking out a monthly budget plan and deciding to make prudent investments can be a difficult task for a millennial. Prioritizing your budget can allow you to effectively save, pay off debt and also to reach a goal. It is important to remember that a payment that can be eradicated with minor inconveniences, or does not impact your life monumentally, is a “want.” A payment that would overwhelmingly affect your quality of life, such as your electricity or paying off a debt, is a “need”.
A well-planned budget goes a long way in keeping away unnecessary loans at bay. As per the rule, 50 percent of the income should be spent on needs, 20 percent should be allocated towards savings and investment, and 30 percent on wants.
If someone has lot of liabilities with loans and expenses then the 50-20-30 budgeting rule might not work. In this case, the rule can be tweaked to say, 50-40-10, to increase the allotment towards debt payments. Here, 50 percent should be allotted towards your needs, 40 percent should be used to repay your debt and 10% towards your wants. Once you reduce your debt, it will automatically help you to grow your savings corpus.
Access to credit products has become faster, more convenient and transparent over the last decade. This has helped millions of people fulfil their aspirations from buying a home or vehicle to funding their education and wedding without having to burden their parents. Accessibility to credit has also brought a large section of the people into the formal banking system, which is a safer alternative.
It would not be right to conflate debt traps with easy access to credit. Debt traps are a result of poor or incorrect financial management and occur when you borrow more than what you can repay. Using the right credit product for the right expense is the first step to avoiding a debt trap.
Millennials are eager to achieve their financial goals faster than ever before, and are keen on using credit to make their dreams come true. A Cibil score of 750-plus reflects good repayment habit and can help consumers get access to credit at different stages in their lives. Hence, new-age consumers need to stay credit-conscious so that their actions today do not negatively impact their future access to credit.
For starters, make timely payments a habit. Ensure you pay all EMIs and credit card bills on time. The next important point is to know your credit limits. Limiting credit utilization to 30% of the total credit limit helps build your credit profile. Maintaining a balance of secured and unsecured loans is viewed positively as well.
Saving for big-ticket items, like a home of one’s own, is another goal. Unfortunately, lenders are imposing stricter guidelines for major types of financing, especially mortgages. Therefore, Millennials need to be able to make a substantial down payment if they want to purchase a home.
Back in the good old days, putting your hard-earned money in the bank was rewarded with decent interest rates that over time translated to an average return. These days, the bank might be a safe place to store your cash, but it’s not necessarily the smartest place to put it.
Savings accounts cause you to lose money over time because their low interest rates do not keep pace with inflation. They’re also subject to maintenance fees that can nibble away at your balance. It is not terrible to keep a small emergency fund in the bank but the bulk of savings should be elsewhere.
As a conclusion a well-planned budget through the 50-20-30 rule coupled with creating a buffer for various needs goes a long way in keeping unnecessary borrowings, particularly related to lifestyle, off the hook. It helps one be wiser with money and create a nest for addressing various life goals with proper asset allocation. Most importantly, it prevents individuals from sliding into a debt trap.
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