1. How do I save money effectively when I have debts to pay off? What should be my priority?
[JJT]: Theoretically, debt should be the priority, because saving can be offset by the interest you incur if the debts are not paid in full. However, having zero savings will not help you be prepared in case of emergencies. In case you need cash, you might end up taking another loan just to survive, so I’d suggest we find a balance between saving and paying off the debt. The real key to debt management is planning. In the case that you have three or more loans and not all are being paid regularly, here’s what you do.
Assess your cash flow. The cash flow is the lifeblood of our finances. That’s why it is important to make sure you have a positive cash flow. List down all your expenses, including the amortization you are paying for your loans.
This way, you’ll have a clearer picture of where you stand and how you can make adjustments to ensure you pay off your debt. You can fix your cash flow in such a way that you get to pay your regular amortization and be able to save a small amount regularly. In case the expenses are all for necessities and can no longer be reduced, take the next tip: negotiate.
Negotiate. A lot of people who have debt problems think that terms are non-negotiable. We have to understand that lenders are rooting for us to pay our debts. This means that they are flexible with the terms to make them acceptable to both parties as long as the borrower has all the intention to pay. So the first thing you can do is negotiate your terms. If you feel the amortization is too steep for your cash flow, try asking for lower amortization.
You can either ask for term extension or lower interest rates. Since it is a negotiation, don’t be afraid to let the lender know the terms that are beneficial for you, but be flexible and open as well to terms being offered by the lender. Once both parties agree to the new terms, the lender will be assured while the borrower will have a little more breathing space – WIN-WIN.
Consolidate. In a situation where you have more than one loan/debt, find ways to consolidate them into just one or two loans. In consolidating, find another lender, or ask one of the current lenders (preferably the one that offers the smallest interest) of your debt if you can take another loan to pay all other loans. This way you will just be focusing on one lender only. This will give you a little more peace of mind knowing that you now only have one debt to pay. When consolidating, make sure the new terms are good enough to make you comfortable in committing to pay until the end.
Save. Once you have a new payment plan for all your debts, you may now set aside an amount for your regular savings. You can start with a small amount as you continue to pay your debt. Once your debts are all paid off, you can allocate what used to be your amortization as your savings. If you are able to do it right during your cash flow assessment, then you can do both at the same time.
Jeremy Jessley Tan, RFP® is a registered financial planner of RFP Philippines. To learn more about personal financial planning, attend the 64th RFP program this September. To inquire, email firstname.lastname@example.org or text <name><e-mail><RFP> at 0917-9689774.