BE DEBT FREE
Managing Debts Effectively.
In the Philippines, many companies make it so easy and convenient for people to borrow money. GOOD Debt versus BAD Debt. Do you have debts? Is debt good or bad? Should you get into debts? THE GOOD NEWS is not all debts are BAD. There's what we call Good Debt and there's what we call Bad Debt. BAD DEBTS are credit card debts or loans that have no potential return on your money. Examples are borrowed money to finance a vacation or to buy a high end gadget for your personal use. GOOD DEBTS are those that have a potential return on your money. Examples are debts to finance a business or your child's education.
Be Aware of this "Buy now, pay later"...
When you go to the malls, you can see promos stating: Zero interest installment rates using credit cards!
Be analytical
When you go to car dealers, they also make it very easy for people to “buy” brand new cars by making the down payment very low. You can get a brand new car with only a Php50,000 down payment. They let your car loan take care of the difference.
Many people don't know that there are two main types of debt interest rates:
1. Add-on: interest rate is based on the original debt amount. This means you pay the same amount of interest even if you already paid up part of the principal.
2. Diminishing: interest rate is computed against the loan balance.
Our word of advice:
Our word of advice: always remember and never forget that all debts need to be paid with interest, as what J. Reuben Clark said, “Once in debt, interest is your companion every minute of the day and night, you cannot shun it or slip away from it; you cannot dismiss it; it yields neither to entreaties, demands or orders; and whether you get in its way or cross its course or fail to meet its demands, it crushes you.”
Why Should We Manage Our Debts?
Debt can turn into a disease. It could control your life, diminish your happiness, and limit your freedom. Getting out of debt may be one of the hardest things to do. It takes a lot of effort and time. But you must persevere. You can never be truly free until you are debt free.
Don't Get Into More Debt
Live below your means. Don't spend more than you make.
Let's say you are saving money and you get a 1% annual rate of return. However, you have credit card debts that you don't pay in full every month. Even if you save at the rate of 1% annually, if your debts have an interest of 42% annually, you are draining money at a much faster rate. You are losing at the rate of 41% annually. When you apply the power of compounding, you will fall into a deep hole. You have to make a decision to control your debt or debt will control you.
Types of Debt
There are different kinds of debts such as credit card debts, personal loan, car loan, home loan, and business loan.
CREDIT CARD CASH LOANS - a loan that allows the cardholder to avail of a portion of his or her total credit limit in cash. CREDIT CARDS - cards issued by a bank, business, etc. allowing the holder to purchase goods or services on credit. PERSONAL LOAN - a loan that establishes consumer credit and granted for personal use. CAR LOAN - a loan used for purchasing a new or a used car vehicle. HOME LOAN - a loan advanced to a person to assist in buying a house or condominium. BUSINESS LOAN - a loan specifically intended for business purposes.
Understanding Fees and Charges
Another killer most people don't know is that aside from higher interest rates, lending companies also charge other fees like appraisal fees, insurance, transaction fees, annual fees, late charges, finance charges, etc. For loans that do not require collateral, the lender charges a much higher interest rate to offset the risk it is taking in lending that money. For loans that require collateral, interest rate is lower. Today, even well-educated, hard-working, good-earning people fall into heavy debt!
Tips to Manage Your Debts
Control your debt or debt will control you. Getting out of debt may be challenging, but with enough discipline, you can free yourself from debts. HERE ARE A FEW TIPS on how to manage your debts.
1. As much as possible, pay off your credit card debts in full and on time so that you don't have to incur charges. The interest rate in a typical credit card is around 3.5% a month or 42% a year. Even if you are saving or investing at the rate of 10% a year, if you have credit card debts, you'll drain money at a much faster rate. Most credit cards have 22 days as grace period. They don't charge interest if you pay in full within grace period.
2. Don't get into more debt. Live below your means and don't spend more than you make.
3. Use cash or debit cards. If you have 5 credit cards, cut up the three cards and retain only one or two cards which you will use for convenience purposes.
4. Spend on necessities, not luxuries. Buy only what is necessary like food, insurance, and utilities. Cut out unnecessary expenses like cable TV and high-end gadgets. Change the habit of spending to the habit of saving.
5. Make a list of all your debts and pay them off one at a time. Pick the easy, low-balance high interest debt first and eliminate it.
6. Increase cash flow to fast track debt payment. Change the habit of borrowing to the habit of increasing cash flow.
7. Consider liquidating your savings and non-income producing assets. Withdrawing your savings to pay your high interest debt can be a very good investment!
8. Change your money mindset. Debt is not a solution but an obstruction. You can never get out of debt if you continue to believe that debt will solve all your money problem.
9. Prepay your mortgage.
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