How can I break the cycle of taking on more debt to pay the rates for debt I already have?

Question

I'm 30, married, and have a 1.5-year-old daughter. My monthly on-hand income is 71,000 ₹ (INR). These are my monthly expenses:

• Home loan: 18,428 (Loan amount: 18,50,000. Number of EMI pending: 150. Tenor: 161 months, ROI: 7.4%)
• Home topup loan: 5,956 (Loan amount: 4,50,000. Number of EMI pending: 169. Tenor: 180 months; ROI: 9.7%)
• Term plan: 1421 (Tenor: 30 years and covered until I turn 78)
• LIC: 4,000 (two different policies, one up to 18 years and another for 24 years)
• Mediclaim (health insurance): 1,000 (12,000 yearly family floater)
• Mutual fund: 1,000 * 2 = 2,000 (two different monthly mutual funds automatically debited from account)
• Credit card 1: Minimum payment: 10,000 (total pending: 1,09,000, interest per month: 3.4%, card limit:1,30,000).
• Credit card 2: Minimum payment: 5,000 (total pending: 44,508, card limit: 75,000)
• Credit card 3: Minimum payment: 5,000 (total pending: 33,880, card limit:75,000)
• Credit card 4: Minimum payment: 5,000 (total pending: 22,460. Interest per month: 3.35%, card limit: 75,000)

So my total expenses are around 57,805. I am not including other expenses like food, electricity, etc. So later in the month, I use credit cards as I have almost used up my salary for the month, and I spend an extra ~10,000 using credit cards.

I have checked the interest of all credit cards and it seems to be around 7,700 ₹.

I do know that I have to control my credit card expenses. But I am at a point where I have to use credit cards to keep things running. So what should I do to break this cycle? I can provide more details if needed.

At this moment I am not even sure how I should break this cycle: Salary → pay credit card bills → out of salary → use credit card.

Additional Details: wife can't work as she takes care of my daughter. Other family member are leaving on different place.

Answer 1

Your expenses are currently higher than your income! This is your priority #1! I cannot stress enough that if you take on new debt in order to make payments on old debt, that is often the last stage before financial breakdown.

This is a serious problem, even without your current level of debt. But you have not given us your monthly expenses. I suspect this is because you do not currently have a budget. Once you solve your budgeting problem, only then can you start to address your current debt problem. Otherwise, you will have the same debt problem next year, and the year after.

In order to maintain this level of expense at this level of income, you have fallen into a trap of borrowing (on long term debt, as well as outrageous short term debt). You seem to mention credit card rates with their monthly interest rates, but if you called them by their annual rates of >50%, it would likely make your skin crawl. If your credit card has an annual rate of 50%, and you fail to pay off the card for two years [it looks like you are currently not paying off your cards for many years], whatever you buy on it actually costs more than double what you think it does.

You have a few options to consider, and may need to perform many changes combined, in order to get more success:

(1) Track 100% of everything you spent last month, whether in cash, or by card, or bank payment. If you do not have a budget and do not review your credit cards in detail, you may be shocked even at this stage to realize how much you spend on, for example, clothes and entertainment. This information will form the basis of preparing a monthly budget.

(2) Prepare a monthly budget, just for 1 month at first. This will be difficult, and there will be a lot of learning and growth before you are able to be confident and successful in this, but you honestly must start, the sooner the better. There are more in-depth guides on budgeting available (google "You Need A Budget" for a popular method), but the basics would be: consider every category of spending (rent, car, entertainment, clothes, food, utilities, gifts, interest payments, principal debt payments, savings), and allocate your income to each of these catagories. Your budget cannot be higher than your income! If you absolutely cannot make the budget 'work' (expenses higher than income), you need to start considering more drastic measures (see further work below).

Part of setting a monthly budget will be to take into consideration your current and future financial goals. When do you want to be debt free? Do you need to save for education for yourself or a family member? Have you thought about how you might be able to retire in the future? These are deep questions that may be scary for you today, and perhaps you can put off these questions for a month or two while you get the rest of your budget in order, but in the near future you must ask yourself honestly about these things.

Off the top of my head, without knowing anything except what you have provided, the following seem like areas of improvement to reduce your monthly expenses:

• You are saving money each month in mutual funds (do you have any savings already you could cash out?), earning probably 10% each year or less, while you have outstanding credit card debt that seems to have annual rates of 50% each year or higher!!! which is better, save 1000 to earn 100 Rs, or pay off 1000 of debt to save 500 Rs?

• You seem to have two different life insurance policies costing you about 5000 Rs a month. Again, if you used these funds to pay off your credit cards, it would save you about 2500 in interest over the course of a year. Cancelling these policies may be difficult, and depending on your age, it may be more expensive to restart these plans in a few years when you pay off your debt and take on a new insurance plan. So it may be a painful decision to cut these, but as it stands it might be necessary. Hard to know before you prepare and follow a budget to see what else can be cut.

• A general rule of thumb is that housing costs should not exceed 1/3 of your income. Whether this is possible or preferable will depend on your location. In some places, housing can cost less than this, in some places it must cost more. Depending on your income level, you may be able to live more modestly than 1/3 of your income, etc.. However using this rule of thumb, we can see that you pay about 1/3 of your income on mortgage and home debt alone. Add in utility costs, property taxes, and home repairs, and I expect this number comes closer to 50% of your monthly income. That is a red flag. **So the question here is: can you lower your housing costs, by moving, or taking on a roommate, or something else? You are in an extreme situation here, and perhaps you need to even sell your house and rent until you are more stable.

• Is earning more income possible, either with a side job, or having someone else in your household also work?

• As for your other expenses, you have given no indication of what they are, but I expect they are probably higher than you might tell yourself. There is no way to know this until you go into your last month of spending in detail, and create a budget and try to stick to it.

(3) Stick to your budget! Every month, you must total up all of your expenses, compare them to how much you budgeted, and determine where you did better or worse than you planned. Yes, every month! Every week even at first could be very informative! This will take time, practice, and commitment. Do not throw it away if you fail month 1, use that as an opportunity to learn.

(4) Create a long term payment plan for all of your outstanding debt. This includes a calculation of how long it would take you to pay off your debt at your planned repayment levels. Since you mostly listed just minimum payments on your debt, I expect that this is how much you are currently paying. I haven't done the math, but most often it takes 10-20 years to pay off credit card debt by making minimum payments, which would mean that everything you are currently buying could have a true price tag of 5-10x what it costs initially. You must aggressively pay down your credit card debt. You must commit to not take on more credit card debt.

(5) Look into consolidating your high-rate credit card debt into a loan with a lower interest rate. Given that you have a second loan against your home, you may have tried to do this in the past, but possibly without also minimizing your expenses at the same time. This is why I said you must set your budget first - without discipline, you will be back in the same place very quickly.

(6) Reach out to those you care about and those who care about you. Now is the time to ask for help. Perhaps you will be able to lean on the satisfaction of self-improvement to motivate you, but you will also need support from those around you. Do not hide your financial situation from your friends and family. If others do not know you are struggling, you may feel more alone, and they may even become part of the problem (pressuring you to spend lavishly on meals, etc.). Whatever support network you can surround yourself with, could become life-saving.

(7) Sell anything you have of value that you do not need. Everything from a car if public transportation is possible, to extra clothing you don't wear, to old videos and entertainment systems and appliances. This will give you a little initial cash to pay down debt further, but also will be part of committing yourself to not continuing to spend new money in these areas. Leave yourself what you need to survive and function, but you will need to make some sacrifices (don't lie to yourself about what you need - if a TV that you could sell for $50 is your only entertainment, don't sell it so that you end up feeling the need to buy a new one for $150 next month). Now would be a good time to consider 100% free entertainment options (outdoor exercise, even simply walking every day, may significantly help your mental and physical well-being, especially if you work indoors all day at an office-type job.

(8) Consider liquidating any savings you have, perhaps even in tax-deferred accounts. I am not familiar with what penalties there may be for doing this in India, and this is usually not recommended, but you are in extreme circumstances, so learn about the options and what they would mean for you.

(9) Avoid excess as much as possible. This means not eating out, not providing assistance to others you can't afford (I don't mean you cannot give anyone a gift, but if you have fallen into the trap of paying for entertainment expenses on credit cards, you may also feel socially pressured to pay for things for others, and now is the time for sacrifice; if you spend yourself into a hole today you cannot help anyone tomorrow).

(10) Ultimately, one option that may make sense for you is to declare bankruptcy. I am not sure of the rules for this in India, but you must do the research to understand what this would mean for you. If this option intimidates you, use the analysis as motivation to pay off your debt instead, but don't avoid learning about it now. If you continue to pay down debt with new debt, you will end up here soon enough, so it would be better to understand what that would mean, and avoid it if at all possible.

You have a long road of learning and discipline ahead of you if you want to get out of your financial position. It will be difficult, especially at first. This does not mean there is no hope. Have hope, faith, reach out to your social network to support you in whatever way is possible.

I wish you the best of luck.

Answer 2

Your situation looks like you are in deep s**t. You have to be absolutely brutal to get out of this, or you will drown in debt. I suggest:

1. Find any way possible to make more money. Overtime, weekends, see if your wife can find a job.

2. Do not spend a penny unless you really have to spend it. Find which store sells the cheapest food, and find which food is cheaper. No new clothes, no holidays. No presents for anyone. No restaurants. You are drowning right now.

3. Make the highest possible payments to repay your credit cards, with the highest interest rate first. That debt must go. Stop paying into savings and pay that money off your credit card debt.

4. Cut up your credit cards so you are not tempted to spend more on them.

5. Go to your bank and see if you can find a cheaper loan that you use to pay off your credit cards. I wouldn't put my hopes up too high.

Having four credit cards is asking for trouble. They get you more and more into debt. (1) to (5) are tough. If you don't do that, that will be a lot lot tougher.

I notice that your credit cards charge 3.4% interest per month. That is an absolute killer. That is 49% per year. Do whatever you can to pay that money back. Get a loan from friends, family, or whoever isn’t a loan shark. Try getting a bank loan. Get a credit card with 20% interest per year if you have to to pay these cards back. Almost anything is better than 49% per year. What on earth made you sign up to these cards? Did you think 3.4% is cheap? If you were my son and that stupid, I’d pay the credit cards back and remove you from my will.

Answer 3

I do know that I have to control my credit cards expense. But I am at a point where I have to use credit cards to keep things running.

Getting more income, as another answer suggests might help, as would focusing on reducing debt. But from a cursory glance at your figures, I would suggest you perhaps need to look in more detail at your "other expenses", and perhaps your housing costs.

The expenses you list total 57,805 Rs, out of 71,000 Rs on-hand income (which, I assume, is after taxes and any other deductions). This leaves 13,195 Rs per month for "other expanse like food, electricity etc." and whatever "lifestyle" expenses you may have.

According to Cost of Living [in India] from Passport to Trade 2.0's website:

Basic need living costs such as food, water and shelter costs you around 15,000 to 20,000 INR.

and:

The room rent in the best areas varies from INR 7,000 to 15,000 per month.

By my calculations¹, this equates to roughly 6,500 Rs per month for basic living costs, excluding shelter.

The remainder of your salary (13,195) is pretty-much twice this figure. However, you also say you spend "around extra 10,000 on credit cards", implying you are spending around 24,000/month on things not itemised above, or slightly over 3½ times the above site's estimate for basic living expenses.

I accept that that site's figures may be more of a bare minimum, and that "reasonable living expenses" may well be higher; however, it does appear – at first glance – that you are perhaps spending excessively. It would also appear that your housing costs (around 24,000/month for the two home loans) are quite a lot higher than that site says are typical (at lest for rented accommodation).

Taken together, you need to take a careful look at any "discretionary" spending. Tightly controlling this, while you concentrate on reducing your credit-card balances would seem to be top priority. As thelawnet's answer suggests, you might also consider suspending your savings plans "for the duration", depending on the consequences of doing so. You perhaps should also take a long, hard look at whether you can really afford your current home at 24,000/month for mortgage payments. If you cannot make inroads into you debt through other means, you may have to consider downsizing or renting.

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¹ As both figures are given as ranges, you can get a number of "differences" depending on which figure you take from the other. The difference in the bottom end of each range (15k and 7k) is 8,000/month; the difference at the top end (20k and 15k) is just 5,000/month. I've gone with the difference of the averages (17.5k and 11k) to get 6,500/month.

Answer 4

This is going to take hard and drastic action.

Until your debt is under control you simple can not afford LIC at there current levels nor your mutual fund.

Your going to have to cut those to 1/10th of there current levels.

No investment is going to pay you enough interest to counter act your current debt.

Great you have a LIC with 100,000 or whatever in 24 years, but then you have 2,000,000 in debt complete waste of money.

You may need to consult a financial advisor regarding any possible penalties or fees. However, your mutual funds will do no good if the debt that gets added to you is more than the future value.

I would completely empty the mutual funds to pay off your debt, and then once everything is paid off you can save 2x the money to make up for the ground you lost.

If you can even pay off 1 CC via mutual funds that's an extra 5000 to pay off the other 3.

Your only other course of action is bankruptcy, and then the court will force you to live within strict budget requirements.

Answer 5

Credit card debt is supposed to be very short-term, which is why it has horrendous interest rates. So priority 1 should be to look for a way to refinance your credit card debt.

Refinancing means to get a loan to pay off a loan, but do so by getting a better loan. One with a lower interest rate and which has a lower minimum monthly payment.

The first place to go to would be your bank. See if you can get a loan to pay off all your outstanding credit card balances and has a repayment plan which is easier to handle. But you might also look into other sources for a loan (friends, family, employer...)

When you can not get a loan, then you might try to negotiate with the credit card companies directly. When a customer struggles financially and is on the verge of declaring personal bankruptcy, then they might agree to a less strict repayment plan in order to recover at least part of the expected money. There is no guarantee that they agree to that, but it's not unheard of. So you can at least give it a try.

When the credit card companies won't budge either, see if there are any of the other fixcosts you can afford to not pay for a while in order to get your credit card debt down. Look into the contracts and find out how many consecutive down payments you can afford to miss before you encounter any serious consequences.

If that fails too, then you might have to downsize your home. Sell it, pay off your credit card debt, and use the remaining money to buy a less expensive home... or rent one.

Answer 6

You have 71000 coming in and your regular payments total 55805. This means that your family must spend less than 15195 per month or you go deeper into debt.

The only way out is to stop spending money. Eat plain rice and chilli, go to work, do free activities for recreation.

Once you have gone a month when you spend less than 15195 you can start paying down the debt. Pick the card with the smallest balance first and pay off as much as you can. Once your debt is gone your family can live on 40,195 per month.

You don't mention your wife in this. It's essential that you get her to cut her spending too.

Answer 7

There are two ways to have a green bottom line at the end of the month: decrease expenses or increase the income. As a general rule I use, the difference between the income and the expenses must increase on any given year.

I live in Bucharest, Romania and started working nearly 20 years ago (2001) for 100$ per month as a full time IT guy. A few months later I had 2 additional IT gigs earning me another 100$ per month (but no free weekends for 30 weeks per year). By 2005 I was making about 600$ per month as a Junior Java Developer + the two IT gigs with an additional 150$ per month - and got married.

After a few years I started to invest the little money I had, just before the 2007-2009 crash. Lost some money, acquired great experience. I learned then to be a little patient before buying things, even if you have the money. My wife stood by me even if we had the advance to buy a house with credit - so we bought one after the crash at half the price. Fast forward to right now, I am well enough to give free advice.

Long story short: you and your family are your most valuable assets. You should grow your income in the main direction you want in life, but there are limits on how much effort you can deliver. Your family must participate in this effort.

And here are some rules of thumb I use:

1. Pay yourself first, aka always have some money left in your pocket at the end of the month.
2. Don't "invest" while you have debt with 3% interest per month or more. You will not be able to obtain the same performance from any investment, so you should use your investment money to pay back the expensive debt fast.
3. Don't grow your debt.

With such simple to follow rules you should be able to successfully manage your family money and live a happy life.

Answer 8

I am not familiar with all the terms you use, but it seems to me that you have a whole bunch of relatively expensive debt including your home loans.

The home loan debt is around 24000 rupees monthly and then you have what appears to be 8421 rupees going into various savings plans. This money you will probably want to freeze some or all of, but you would have to check the consequences of doing so.

For example instead of the floating health plan, are there government or employer health options ? You cannot afford everything you are paying for now. Your salary seems to be ok for a country like India, but your expenses are too high.

At what rate is your salary increasing annually ?

Your credit card debt is 2 lakh, which is about three months salary, which is not too terrible, but it will increase over time and you will pay more and more of your income in interest. So you need to stop some of those savings plans and pay off debt. Also you probably need to cut expenses. It is necessary for you also to look at the interest rates on the cards, and pay off the most expensive one. Since your don't mention the rate, it's hard to say how bad these are.

Eventually you will have a good lifestyle but this will require salary increases or paying off your home debt. At the moment because of high debt you cannot afford much.

Your goal should be to create a budget where expenses including debt are less than income. If you can pay off the credit card debt by some cheaper way such as an employer loan or from family that would be a good idea.

The best way would be to figure out how to get an affordable monthly payment - 25,000 INR in monthly payments is too much for you on top of the home debt . If you could refinance it at low cost,and pay it off over 5 years(so maybe 3500 monthly), stop using credit cards, and then live within your income then you will be fine.

Answer 9

In addition to other answers, apart from taking into account ALL your expenses and cutting down on any that it is possible to survive without, you might want to check a thing that has been quite popular since the last crisis in our country (I personally also do it, but for other reasons).

It is that for the duration of clearing up your debt, you move to a smaller/cheaper apartment/house and rent out the existing home you have a loan against.

It depends both on your particular home and the housing market in general, as well as feasibility of finding another place to live, but if you can rent a cheaper (and probably smaller) apartment somewhere else, and rent out your existing home, it could help you repay your debts faster.

Of course, you should take into account additional expenses, which might arise, if you move to another place. For example, if it is further away from your or your other family members' everyday travel places such as job, you could be getting into higher travel expenses.

However, if [cheaper apartment rent] + [expenses tied to the cheaper apartment] is lower than [rent you get from your existing home] you make a saving, EVEN if the rent you get doesn't cover your loan payments.

Of course, renting out does include its own expenses, however, it varies A LOT depending on your location and housing market. Landlords are not always expected in all countries to maintain a house in pristine condition all the time. Renters do tend to use up places more than owners though, so you might have to do some minor redecoration every couple years, especially if renters change.

Other than that:

1. So my total expenses are around 57,805. I am not including other expenses like food, electricity, etc.

If your take home salary is 71K, and you can only account for 58K, you have a pretty big invisible 13K+ Rs hole in your budget. That's 22% of your income. Granted, the 58K is the larger part, however, since you are using up at least 10K per month in extra loans, you should definitely look at whether you can cut down that 23K to the actual 13K you have.

2. It frequently makes sense to concentrate on the debt that you can clear fastest. You get rid of the smaller debts and you free up money to save towards the larger ones.

3. A bit about goals.

You are now using up around 114% of money you earn (based on how much you say you take out in extra credit cards every month). This is unsustainable. You will have to reduce it dramatically somehow, as per answers here.

However, the goal should be that ALL mandatory living expenses -- housing, debt, commute, food, education, electricity, water, etc. shouldn't take up more than at the very most 50% of your income. The number is somewhat arbitrary, but it is a sort of first target you should aim for in long term (since now you are so far from it).

It is usually impossible to reduce oneself to complete misery and spend nothing on non-mandatory expenses (leisure, travel, eating out, cinema, anything that is not absolutely required). However, what helps is assigning some fixed amount every month that you now will not put you into ever larger debt.

But at the moment it seems it only will be possible if you are able to refinance your debt or otherwise reduce the 57K you spend (hence the idea of renting out existing home).

Answer 10

STOP SPENDING MONEY.

And then:

The only real solution here is higher income.

1. Weekend job of some sort straight away.

2. Unfortunately your wife will have to work, perhaps part-time. It should be trivially possible to have family childcare at no expense.

Minor issues: (A) immediately temporarily (i.e., for a year or two) terminate investments / healthcare if this is possible, and put the money to the cards (B) there may be some way to cancel the cards and consolidate to a lower-cost loan.

Unfortunately A and B won't solve the problem.

The only solution to this problem AFTER YOU STOP SPENDING MONEY is more income.

In the long-term you can only achieve that by advancing your career, but in the short term you will have to do 1 and 2, unfortunately.

Unfortunately the only solution to "needing more money" is "getting more money", other than tweaks.

To repeat. The ONLY solution here is:

STOP SPENDING MONEY.

And then:

Would have to work much, much more - to the point of minimum sleep 7 days. The situation is debt + child. Spouse also has to take a job.

Answer 11

The good news here is that your payments against the cards (25K) exceeds the additional debt you are accumulating (10K) so as long as the finance charges aren't extremely high, your total debt should be decreasing. If that is not the case, some information is missing here.

If it is the case that you are making a net 15K debt payment towards your cards every month and decreasing your overall debt, you don't seem to be in a trap at all. If it were the other way around (paying 10K and adding 25K) every month, then you'd have a real problem. The question here is partly: how did you accumulate this debt in the first place? Has your situation changed somehow?

One thing I notice is that your minimum payments are the same for the last three but the balances are not. That suggests there's some sort of minimum to the minimum payments. Is that the law in India or your state? The minimum payment on the last one is over 20% but the first 2 are more like 10%. If you can consolidate these to reduce the minimum payments by 10K, you won't be needing to continue to add debt.

At a high level, whether you pay off 25K a month and add 10K or just pay off 15K a month and add 0K doesn't matter much. But it could help you feel better about your finances, however. And if your interest rates are high on any of these cards, transferring the debt to a lower interest rate can really help. I'm not sure about how it works in India but it's common in the US for cards to offer low temporary incentive rates for transfers. You need to read the fine print but paying e.g. 0-3% for a year (or up front) and a fee when you've been paying e.g. 20%+ can make a huge difference in your finance charges. If you use those savings to pay off debt, it can definitely be worth it.

Aside from looking into that, take a very close look at your expenses. Can you find any savings? For example, buying things in bulk e.g. a 25kg bag of rice instead of a 5kg. Can you find things on sale? If you eat out, stop and pack your lunch. Discretionary costs are out. Take a hard look at what you buy for your baby: can you cut some things out of that? I know, that is hard: kids are expensive but there are probably ways to save there.

Based on your updates, I think you should seriously consider dropping the LIC payments and the mutual fund payments. AS a parent myself, I fully understand the desire to provide for your child but you aren't doing her a favor if you don't manage your money well. Your credit card interest rate is effectively nearly 50% a year. I can't imagine the returns on LIC coming close to that but I don't totally understand the conversion between Rs and lac. Think about it this way, paying off the principal of those cards is like getting a 50% return on your money. Get your finances straight first. You are currently paying 7700 in interest. That's more than half of your 15000 net payment. Using that 6000 increases your principal payment by more than 80%. Those CC finance charges are the enemy: the sooner you can reduce or eliminate them the better.

Lastly, is there a way you can get some more income? Asking for a raise might not be an option but what about a side gig?

The big point here is that you need to focus any new or 'reclaimed' income on paying off the debt. Once you have, you seem to be doing fine.

Answer 12

I do know that I have to control my credit card expenses. But I am at a point where I have to use credit cards to keep things running. So what should I do to break this cycle?

You just answered your own question. Do what you know you need to do. Control your credit card expenses.

You don't hear other people saying "My home is burning and I know I need to put water on it. But I am at a point where I have to add fuel to keep things burning. So, what should I do to break the cycle?

The problem is you don't see your actions as causing the problem; and, if you continue then by the time you start reaching for water the fire will have burned everything and there won't be anything left to put out.

Sell anything of value and pay off the smallest credit card, then destroy the card. Take the extra money to pay off the next smallest and then destroy that card. Repeat until you have no more credit cards, then never buy anything smaller than a house on credit again. Every extra bit of money you have needs to go into the smallest debt you currently have. You are dangerously close to losing everything because of the credit cards.

If in attempting to follow this plan, you might discover that it is already too late. If so, sell the house before it is taken from you, pay back the money to the bank, and move into a cheaper place.

Borrowing more isn't "keeping things running" it's poisoning your future. Poison your future enough, and you and your family won't have a future.