Finance is the study of investments and the risks involved with them. It drives a person to buy goods according to their time value of money and the risks associated with their return rate. Personal finance, therefore, is a type of financial management where a single individual or a family as a whole tries to budget, conserve, and use fiscal resources over a period of time. These functions are performed keeping in mind the various financial risks and future requirements of the family unit or individual.
A large part of finance is formed by personal debts which regulate the household debts in an economy. These debts collectively are a key factor in the economy of a country. They are not necessarily loans and can be the credit borrowed. These personal debts, if left unchecked, may also result in bankruptcy which is a major concern for the economy.
Personal debts are imposed when individuals take money from creditors to seek some goods to maintain their standard of living. They include mortgage loans, transport vehicle loans, and credit card debt. Credit card debt is the most dangerous of them all as it encourages the user to use credit by using anticipated income before it is actually generated. This is a financial risk as failure to repay can lead to high amounts of interest on the individual.
Credit cards are the chief reason for people to land in personal debt. They encourage the use of unearned cash to buy goods instead of real cash. This leads to the transparency effect, which makes the consumer unwilling to spend real cash because it makes them feel that they are losing something material. As an individual moves away from the non-transparent mentality, they lose that sense of loss. When this feeling is reduced, it causes them to buy goods freely which might be beyond their financial bracket.
Therefore, credit cards are a lure to incur personal debts on consumers by giving them an allowance to use more than they earn. Credit cards usually have a grace period during which no interest is marked against the credit consumed. However, as soon as the grace period ends, the creditor is liable to apply any amount of interest which satisfies its banking policy.
Personal bankruptcy occurs when an individual admits or is forced to accept that they cannot repay their debts with their current income. A legal progress for personal bankruptcy involves a person submitting a file to the court, which explains their financial situation in detail. This must be accompanied by a loan repayment plan. A loan repayment plan is entered with a 3 to 5-year repayment tenure during which a person must repay the borrowed amount. A legal application for bankruptcy also allows for a possibility in which the creditor might exempt the consumer from some types of loans. Bankruptcy, however, demands that you give up or place some of your liquid assets such as a house or car under the creditors’ authority.