Financial Planning Tips for Those of You Who are Forced to Increase Debt

Financial Planning

Some people certainly have their reasons why they should be in debt. However, it cannot be denied that the existence of debt can erode the value of net worth, and make it difficult for us to save.

As long as the value of your total debt is still below 50% of the total asset value, your total debt is classified as healthy. However, it is not certain that the amount of debt repayments you have each month is healthy.

The following are tips on financial planning for those who have to increase debt to meet their daily needs or buy assets.

The maximum monthly debt installment is 35% of income, why?

The maximum debt service ratio (DSR) value is 35% of income.

But what happens if the bank or lender approves an installment request of 50% of our income? Still, that number is not ideal.

Too much debt repayments can lead to decreased quality of life. Our ability to make ends meet per month will be disrupted.

Not to mention, it will be increasingly difficult for us to set aside money for emergency funds, protection needs, and long-term investments. 

If you have to go into debt again, first find out the estimated installments

If a person who currently has home installments then has to buy a car on credit for personal use, can this be justified?

It can be justified, provided the total outstanding debt value does not exceed 50% of the asset value and the DSR is not more than 35%. 

Take long installments or big Down Payment?

The tenor of debt installments or the amount of down payment can certainly affect the number of your debt installments or installments. 

The longer the loan tenor, the lighter the installments will be. But be careful, long tenors are generally accompanied by high lending rates.

Meanwhile, the amount of down payment will certainly affect the principal value of the debt which will also have an impact on the number of installments per month. Paying a large amount of down payment will reduce the principal of debt so that it has a light impact on installments per month. However, do you currently have large amounts of cash available? 

You can use these two ways to adjust the estimated installment size. However, understand carefully about the amount of interest expense that you will have to bear later. 

Do not confuse the family by inheriting debt

Not only assets that you will pass on to your family, but the debt will also be inherited. Make sure that when you apply for debt from a financial institution, you are covered with life insurance.

Life insurance will certainly function great to help us face the risk of loss of income when we die at productive age. The sum insured disbursed from life insurance is tax-free and can be used to replace the source of income lost due to the loss of the backbone of the family.

Generally, everyone who applies for loan funds will be given facilities in the form of life insurance. Apart from replacing the source of income, of course, the sum insured can be used to pay off debts.

When emergency funds are not enough, do not go into debt

Likely, your debt-to-assets ratio and DSR are still healthy, but if your current assets are too small then it is also quite dangerous.

The amount of the basic liquidity ratio or what is often called an emergency fund is 3 to 6 times the monthly expenditure. It all depends on your marital status and the risks of your job.

If you are single and have no dependents, 3 monthly expenses may be sufficient. But if you are already married, of course, an emergency fund of 3 times the expenditure will not be enough.

Therefore, just make sure that the emergency fund needs are available long before you apply for credit. 

Those are things that should be known in managing finances when we have to be in debt. Just make sure your decision to go into debt is something you need, not just debt for consumptive purposes, or to cover your mounting debts. 

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