Question: My finances are a mess. I have a debt right now of almost P350,000. I can’t pay for it all at once because my salary is just a little above the minimum wage. Every time I pay my monthly charges, it’s like nothing happens to the principal. I can pay only the minimum due because if I pay more, nothing will be left for my family’s daily expenses. How do I get out of this mess? From Naya V. of Parañaque City through email (firstname.lastname@example.org).
Answer: Debt has been a cancer to our society. It is a double-edged sword. It has its own benefit that people can take advantage of. But the other side can bury you mentally, physically and emotionally. A lot of people have been hooked up to the negative side of debt. They think that if they have more money from debt, they can spend it all to the last cent, believing that paying it off would just be as easy as paying regular bills.
When to use debt
Before I jump in to my advice, allow me to share more insights about the proper use of debt.
The right use of debt is when you purchase an asset than can bring you some returns. Better yet, fund a business. This way, the interest cost that is incurred by debt can be compensated with the possible growth and income of your business or the return of your asset. The rule of thumb is that debt should not go beyond 30 percent of your income. It really depends on your cash management. Talk to independent financial planners to help you assess your cash flow before going into debt. Lastly, don’t use debt to support your wants and daily consumption.
Things to consider before going into debt
Before going into debt, evaluate yourself first by asking these few questions. Do I really need this debt? Will I really benefit from this in the long run? Will this add up to my asset or just add more to my liabilities? Will I be a better person using this debt? Will my family really benefit from this? Can I sustain paying this without sacrificing expenses for my other needs?
Always be guided with words from our forefathers. Don’t reinvent the wheel. The Holy Bible, in Proverbs 22:7, says: “The rich rules over the poor, and the borrower is the slave of the lender.” Remember that you need to repay your debt if you do not want to be a slave.
In personal finance, the strategy is always to spend less than what you earn to avoid bad debts. All financially successful people have been doing this time and again. They avoid using debt for their daily necessities. As Warren Buffett once said about spending: “If you buy things that you do not need, soon you will have to sell things you need.”
If you are using credit cards, use it as a backup in times of emergencies. As much as possible don’t use it to buy things in the mall.
I wrote an article once about debt. It has always been my advice to follow these steps:
Accept the fact that your finances are in trouble. Be consciously aware of this because the moment you accept and humble yourself, a change inside you takes place. That is the most important part—changing within so as
to change without.
Know where you stand on your debt. The moment you know it, you have solved 50 percent of your problem.
Do not hide from your lender. Because of human nature, we tend to run away from our problems. However, it is wise to face it with heads held up high. Talk to your lender and restructure your debt. Tell your lender that you are having problems with your debt agreement.
Instead of paying the larger debt first, start by paying the smallest debt.
Always commit to achieve success in closing out your debt. When you keep doing this, you are moving forward in achieving financial peace. Then, commit to long-term goals.
Serge Barcenas Bargayo is a registered financial planner of RFP Philippines. He is the managing director of Certa Inc. (Family Estate Planning and Investment Advisory). To learn more about personal financial planning, attend the 59th RFP program in January 2017. To register, e-mail email@example.com or text <name><e-mail><RFP> at 0917-9689774.