Earning Rs 1.5L a month but feeling trapped by EMIs. How do I know if my debt is actually dangerous?

You need to run your finances through a strict four-part debt health test to see exactly where you stand. Give yourself one point for every metric you pass. If you fail a metric, you get zero points for that section.

First is the credit utilization test. You need to check if you are using less than 30% of your total available credit. If your credit cards have a combined limit of Rs 2L and you consistently use more than Rs 60k, you fail this test.

Consistently relying on more than 30% of your limit means you are using debt to fund your basic lifestyle. Second is the asset-liability test. You have to list all your active loans and EMIs and categorize them.

A laptop you need to earn your living is an asset. An expensive holiday or a status car is a liability. You only pass if less than 50% of your loans are funding liabilities.

Third is the EMI-to-income ratio. Sum up all your monthly EMIs and divide that by your Rs 1.5L take-home pay. You only pass this test if your total EMI burden is strictly below 30% of your monthly income.

Finally, you have the emergency fund test. You must have six months of expenses saved in highly accessible cash or liquid mutual funds. This cannot be locked in real estate or equity.

If your active income drops to zero tomorrow, you need this cash to cover your basic bills and your ongoing EMIs. If you score poorly on these four metrics, you are caught in the retail debt trap.

Modern lending is designed to keep you in a never-ending loop with minimum amount due prompts and no-cost EMIs. You need to stop taking on any new consumption loans immediately and focus on clearing the existing ones.

Disclaimer: All information shared above are strictly for educational and informational purposes only. It should not be construed as financial or investment advice.