Debt can be a blessing or a curse for you and your household depending on how much of it you have, how much you are accumulating over time and how well you manage it. Borrowing to finance development projects is always a good idea if the rate of return is above the interest rate charged on the borrowed funds. On the other hand, borrowing to finance you’re your recurring monthly expenses can lead you into a debt trap that will be difficult to get out of. Balancing between what you need in your life and whether financing it through borrowed funds is the best idea goes a long way in helping you avoid falling into the rat race of repaying monthly debts.
Planning is very important when it comes to personal finances and the pursuit of financial freedom for you as an individual or as a family. At the beginning of every year, you need to have a budget that spells out your expected expenditures and your assured sources of income to offset those costs that you shall incur throughout the year. In most cases for ordinary citizens with average monthly incomes will find that their budgets do not balance; with expenses exceeding their incomes.
At this point, taking a step back and strategically thinking through how you will meet the budget deficit is very important. Most people will tend to borrow money to fill the budget gap and keep the borrowing cycle running from one month to the other. However, there are other more prudent ways to go about a budget deficit without getting unnecessary debt burdens that hinder your personal or family financial growth.
To eliminate your budget deficit, the two sustainable ways of dealing with it are through increasing your income levels or reducing your expenses. The first option has its own limitations as the fastest way to bridge your budget deficit without getting into debt. This is due to the fact that it might take a long period of time to get a second job or get a salary increase at your current job. You will therefore need to find other alternative ways to raise the extra income needed to fill in your budget deficit. Some people choose to allocate a small percentage of their savings and monthly income into open ended mutual funds, forex trading or to stocks trading in order to earn an extra passive income. Others choose to learn how to trade binary options and they open online trading accounts to make extra incomes through the internet while trading remotely.
However, getting into the financial markets and starting to trade there can be a risky venture that might also wipe all your small savings if you are not well experienced. You will therefore need to a take some time before you can master the art of trading at the capital markets and dynamics surrounding online trading before you can start getting high returns from your investment. Meanwhile as you learn, your monthly budget deficit will be piling up debt for you since you are not generating enough extra income yet to offset your budget balance. Reducing your expenditure therefore becomes the immediate viable solution you have if you need to avoid borrowing money to fill your budget deficit every other month.
Cutting costs in most cases is easier said than done. Individuals and households tend to have their routine monthly expenditure that they are accustomed to until it forms part of their culture. Based on your living standards too, some things which might appear to be luxuries to others over time become basic needs for you. When it comes to bridging the negative gap between your expenses and income, cutting off some of these luxuries from your budget becomes a difficult decision to make since you are already conditioned to expect and have them regularly. The cost cutting decision becomes a tough call especially for households with small children who might not understand why their toys and trips to the cinema are being wiped out of their monthly routines. However, having the long-term goal of a debt free life with freedom to save and invest to grow your wealth steadily, no sacrifice will be too big to make.
The optimum strategy of getting out of monthly debt cycles is by combining both income generation and cost cutting measures. With growing income levels and your costs remaining relatively constant or falling over time, your monthly budget deficit will diminish as your savings increase. In the end, you will have saved enough cash to start investing through different channels such as capital markets and real estate in order to grow your long-term wealth.
photo credit: One Way Stock Stretch Your Dollars White Background via photopin (license)