Debt
Also written Personal debt
Money borrowed to cover a shortfall, when your expenses are more than the funds you actually have in hand — the booklet's own one-line definition.
In plain language
Debt has one job in the booklet's definition: it fills a gap. When your expenses are more than the money you have in hand, you borrow to cover the difference, and that borrowed money is your debt.
Debt sits on the opposite side of the household ledger from savings and investments. Savings and investments are things you own — they are assets. Debt is something you owe — it is a liability. The booklet's worked example of net worth treats a house loan and a car loan as liabilities to be subtracted from what a household owns.
Debt is not automatically bad. A home loan or an education loan can fund something worth far more than its cost. The booklet's own worry is not debt itself, but debt taken on without a plan to repay it.
How it works
The booklet's definition, verbatim: "Money borrowed to meet shortfall of money when expenses are more than the funds available in hand is called debt."
It shows up on the liabilities side of net worth. In the booklet's worked household example, total liabilities of Rs 20,10,000 — a Rs 20,00,000 house loan and a Rs 10,000 car loan — are subtracted from total assets of Rs 55,25,000 to give a net worth of Rs 35,15,000.
Chapter 8 (Borrowing-Related Products) gives the tools for managing debt responsibly: check your credit score before borrowing, know the 5 Cs of credit a lender will judge you on, and use the seven "Tips to Avoid a Debt Trap" — among them, do not buy more than you can afford, and never treat a credit card as free money.
A worked example
Suresh earns Rs 60,000 a month. In a month his rent, EMIs and household expenses come to Rs 68,000 — a shortfall of Rs 8,000.
To cover it, he uses his credit card, which is now debt: he owes the card issuer Rs 8,000, plus interest if he does not clear it by the due date.
Over a year, if this shortfall repeats every month, Suresh accumulates Rs 96,000 of high-cost revolving debt on top of whatever he already owed — purely because his expenses outran his income, exactly the situation the booklet's definition describes. The fix the booklet points to is not a bigger loan; it is going back to Chapter 3's financial planning process and bringing expenses back under income.
Why NISM asks about it
Chapter 2 (Key Concepts in Personal Finance) defines debt in one line, right after defining savings, investments, assets and liabilities. Chapter 3's net worth worked example uses a house loan and a car loan as the liabilities. Expect a one-line recall question on the definition, and a net-worth calculation that asks you to correctly place a loan on the liabilities side.
Common exam traps
- Debt is a liability, not an expense. The EMI you pay each month is partly expense (interest) and partly a reduction of the liability (principal) — only the principal portion actually reduces the debt.
- The booklet defines debt narrowly, as money borrowed to cover a shortfall — it does not separately classify "good debt" and "bad debt"; that judgement is left to the reader via the Tips to Avoid a Debt Trap.
- Do not confuse debt with borrowing as a general act — Chapter 8 calls borrowing "an act of taking money and paying it back over a period"; debt is the resulting obligation.
Check yourself
1.Which of the following is correct?
- a)A fixed deposit is a liability and a bank loan is an asset
- b)Assets are items you own having economic value; liabilities are items you owe to others or have borrowed from others
- c)Only borrowings from banks are liabilities; money borrowed from an individual is not
- d)Debt and expenditure mean the same thing
Show the answer
Answer: (b) Assets are items you own having economic value; liabilities are items you owe to others or have borrowed from others
"Items that you OWN and have economic value are your ASSETS and items which you OWE to others or HAVE BORROWED FROM OTHERS are your LIABILITIES." The chapter's illustration settles option (a): "if you save and then invest in a fixed deposit, IT IS YOUR ASSET. On the other hand, if you borrow funds/take a loan from A BANK OR ANY INDIVIDUAL, it is your LIABILITY." That phrase "or any individual" kills option (c) — ₹60,000 borrowed from a brother-in-law is as much a liability as a home loan, and leaving informal borrowings out is the commonest way an Indian household's net worth statement becomes fiction. Option (d) confuses two different things: debt is "money borrowed to meet shortfall of money when expenses are more than the funds available in hand", whereas expenditure is money spent.
2.Which of the following matches the chapter's tips to avoid a debt trap?
- a)Always take the maximum available loan tenure
- b)Credit cards should only be used to facilitate payment and not as a means to borrow money
- c)Use a credit card rather than a debit card to build a credit history
- d)Borrow to invest, since investment returns exceed interest costs
Show the answer
Answer: (b) Credit cards should only be used to facilitate payment and not as a means to borrow money
"Tip 03: Realize that CREDIT CARDS SHOULD ONLY BE USED TO FACILITATE PAYMENT AND NOT AS A MEANS TO BORROW MONEY." Two companion tips reinforce it: "Tip 04: NEVER TREAT CREDIT CARDS AS FREE MONEY" and "Tip 06: USE A DEBIT CARD INSTEAD OF A CREDIT CARD. It ELIMINATES THE RISK OF SPENDING BEYOND YOUR MEANS" — which disposes of option (c). Option (a) inverts Tip 02: "Getting the maximum mortgage loan tenure does not necessarily mean we need to take as long to repay" — a longer tenure means a smaller EMI and considerably more total interest, so the maximum is a ceiling rather than an instruction. Option (d) contradicts Chapter 5's don'ts: "Don't borrow money for investment." Chapter 4 supplies the mechanics behind the card tips — a credit card runs on "the lending bank's credit facility" with interest levied if the outstanding is not paid on time, while a debit card is linked to your own account.
3.An investor disputes the surrender value of her unit linked insurance plan and assumes SEBI regulates it because part of the premium is invested in equity and debt. Correct her.
- a)She is right — the invested portion brings it within SEBI's purview
- b)A ULIP is a contract of insurance and goes to IRDAI; the test is the nature of the contract, not where the premium is invested
- c)It goes to PFRDA, since it has a savings element
- d)It goes to the Ministry of Corporate Affairs, since an insurer is a company
Show the answer
Answer: (b) A ULIP is a contract of insurance and goes to IRDAI; the test is the nature of the contract, not where the premium is invested
The table gives ULIPs their own row precisely to close off this argument: "Unit Linked Insurance Plan — Insurance Regulatory and Development Authority of India (IRDAI)", immediately after "Contract of Insurance — IRDAI." Her reasoning is understandable, since Chapter 6 described a ULIP as a "combination of insurance and an investment vehicle" in which "a portion of the premium... is utilized to provide insurance coverage... and the REMAINING PORTION INVESTED IN EQUITY AND DEBT INSTRUMENTS." But the test is what the contract is. IRDAI, as Chapter 6 said, "regulates the insurance sector in India" and aims "to protect the interests of the insurance policy holders" — which is exactly what she is. The same principle governs row 10: a pension or insurance scheme framed under EPF goes to PFRDA or IRDAI according to its character, never to SEBI merely because a corpus is invested in the market.
Where this is taught
Free preparation for NISM Series SEBI-ICERelated terms
- AssetsThings you own that have economic value, such as a bank balance, a fixed deposit, a house or a car. Assets minus liabilities gives your net worth.
- BorrowingTaking money and paying it back over a period, usually through Equated Monthly Instalments, used to meet a financial goal when savings alone are not enough.
- Credit cardA card that lets the holder pay using a lender's credit line rather than their own account balance, with interest charged if the outstanding amount is not paid on time.
- LiabilitiesWhat you owe to others or have borrowed from them, such as a home loan, a car loan or money borrowed from a person. Assets minus liabilities gives your net worth.
- Net worthEverything you own minus everything you owe — the one number that says where a household actually stands, and the starting point of any financial plan.