What Is Finance?
Finance is the field of study which deals with the investments made and their consequences. It is a science of money and its management. Finance aims to target each object according to its time value of money. This emphasizes that things are priced on the basis of their risk level involved and the rate of return that is expected from them.
Household finance comes under the category of personal finance. It deals with the finances involved in a household and its budgeting. Household debts are also included here which deal with consumer debt and mortgage loans.
Budgeting means that you estimate the amount of money available at your disposal after fulfilling all deductions and taxes. Budgeting means that you maintain all your expenses and bring all your spending within the range of your available capital. It is necessary to ensure savings and cost management of the household expenses. Budgeting needs consistency and accuracy or else you will end up paying more than you earn, which can lead to household debts.
Household debts can be defined in many ways, but the common debts include equity loans, mortgages, and loans. Household debts can be measured across an economy and can help us know income debts. The burden of household debts can be measured in terms of the amount of interest they generate relative to the income of the borrowers. They are not necessarily a bad thing because having credit and using it maturely is a part of the personal fiscal responsibility.
Since the start of the 21st century, household debt has continuously been on the rise due to the rising living standards of human beings. These high standards of living forced individuals to buy durable goods through loans and credit, which are chief contributors to household debt. These durable goods consist of the latest electronic gadgets, new auto vehicles, and advanced appliances. The escalating numbers of household debts against the GDP of many European countries and the USA caused the financial crisis of 2007-2012.
This crisis was, however, waived off because a high majority of people took a step in deleveraging household debts and bringing the household debt percentage to a lower value.
Reducing Household Debt
Household debt can be reduced through three ways:
- It can be paid over time from the monthly income or savings.
- It can be reduced due to a debt write-down, refinancing or, in the worst case, bankruptcy.
- Household debts can also be lowered through inflation.
Paying off debt from the household income is challenging because much of household debts are due to investments in family homes. They take a long time to pay off. Creditors can be negotiated with in case of legal bankruptcy, which may allow one’s debts to be dismissed up to a certain amount. If your income is on the rise while the debts are constant, the debts become easier to repay because of the greater income which can be spent. However, this isn’t