How to avoid debt obligations

A worsening financial situation is caused not only by a lack of funds but also by managing them incorrectly. One of the common mistakes of people who find themselves on the brink of poverty is "living on credit". Uncontrolled spending leads to expenses exceeding income. Therefore, to have enough funds for the main operations during the planned period (let us say a month), a loan is taken. The distribution of income in the next period provides for repaying the obligation. But after that the process repeats again. This is exactly what does not let you reach stability.

Debt obligations are divided by repayment period into:

• short-term – repayment must be made after a week, a month or six months;


• long-term – the repayment period is 12 months or more.

Depending on the terms of repayment, an obligation can be:

• interest-free – exactly the sum that was borrowed is returned on repayment;


• interest-bearing – besides the "loan principal", the main sum of the loan, you must return the interest agreed in advance.

You can have debt obligations to individuals or legal entities. But in any case they require repayment. And if interest is charged, additional expenses as well. Therefore, to stabilize your financial state you need to avoid loans and credits.

First you need to analyse the movement of funds and determine why they run short. If you incurred an obligation in the reporting period, you need to repay it as soon as possible. You should not take any further credits or loans. It is best to cut certain expenses, systematize them and draw up a plan for the next period.

It is better not to take further credits. But if the need does arise, they should be given priority when distributing income. As a rule, the terms of their repayment provide for a certain monthly payment. If the terms of repayment are not defined, the sum for repaying them should be at least 20% of total income.

To avoid facing the need to borrow, you need to form reserve funds correctly. They consist of monthly contributions of 5%. You should also pay attention to forming savings funds. Contributions to them are 10% of the total income.