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DEBT CYCLE

Debt – This word scares me. First things first, what is debt? It is the money which you have taken from a bank or any finance company, for which you will pay a certain amount of interest to the bank as agreed before. Let us see how it turns into debt cycle.

How it starts and where it takes you to?

Let us say if you are one of those youngsters who love to upgrade with the latest tech, fashion, and culture. To manage this lifestyle you might be spending your earnings. Everything goes well until all this stuff costs stays under your earnings. Once it goes beyond income, you start using a credit card. This is where you are entering into a trap in which most of the world population and even countries failed to get out. In the end, I will mention a few steps to get out of this but for now, let’s go on with the topic.

These days credit card is common in everyone pocket. The average overdue annual interest rate on a credit card would be 25 to 30%. It is way high than any kind of loan. If you are using your card in a controlled way and paying dues in time well and good but if you are addicted using credit cards then it will be very difficult to get out of this.

I saw people who make more debt to clear the existing one if you are one of those here is the caution you are going to stuck in a debt cycle that never ends. They apply for a personal loan to clear the credit card bill or to clear loan taken from another bank and this continues

What is Good Debt?

Debt which you made to create an asset is called as good debt. If you are taking a loan for an investment or for higher studies, it is going to be a short debt until you manage it carefully. This kind of loan which has a scope of earning in terms of knowledge or assets in the future is called as good debt.

Is Debt bad?

Not, actually. As I said before a good debt is not bad. If a person or a company is not able to pay its money back to the creditor then it is called as bad debt.

How to differentiate between good and bad debt? Let us say you decided to invest in a company so while checking the balance sheet you observed that the company has a certain amount of debt. Obviously, you will check the reason for debt. If it is for the expansion and growth of the company, you can consider it good debt.

Many companies take a loan it is common. But the reason for taking debt is one of these

  • To manage its day to day expenses like continuing operations or paying salaries to employees.
  • For the repayment of previous debt.

Then you should avoid investing in that company because such type of companies is more likely to go bankrupt. The debt taken by these companies turns into bad debt

How do countries deal with Debt?

Almost no country is free from debt including The United States. Usually, governments make debt for the development of their countries. In return to the money, the government issue IOU or Bonds to the investors.

The government pays taxes to the investors from the revenue generated from taxes and other sources of income. If the revenue is not sufficient for the development, It again takes a loan from the investors.  If debt increases beyond the GDP growth of the country the investors may get worried and ask for the government to pay off its debt. To resolve that situation the central bank print more money to pay its debt. This solves the problem. But not for the long time, again the government makes debt and issue IOU or Bonds as usual. This continues on and on till one point, then all of a sudden the country gets into a debt trap and whole economy collapses.

You may get one doubt – everything going fine like a cycle ( Debt-government issuing IOUs-Central bank printing money for repayment-again debt….) but what went wrong? The answer is simple. The central bank is printing more money to repay the debt this is increasing the inflation in the country. Inflation is nothing but if the currency distribution in very high the prices of the goods in the country skyrockets. This makes the life of the common man very difficult. Not only this the value of the currency falls pushing the country into crisis.

How you can get out of it?

Think before taking a loan whether you can pay it. If you have already in debt, then here are some of my suggestions

  • Control your lifestyle and do not get stuck in the debt cycle.
  • Do not buy things you don’t want.
  • Sell expensive things are not using anymore.
  • Concentrate more on monthly payments to the bank than your expenses.
  • Take a part-time job.
  • If you get any bonus amounts, use that amount for repayment.

Hope some of my tips help you. If you like this post, please share it.

Here are a few more topics you may like https://www.mintpaisa.com/education-that-no-school-teaches-you/,https://www.mintpaisa.com/money-vs-currency/,https://www.mintpaisa.com/assets-and-liabilities-how-this-affects-your-life/

Read more about bonds here – https://www.investopedia.com/terms/b/bond.asp

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