“Utang” Culture: Getting on top of borrowings

Knowing how to manage your borrowings will help in your financial stability

Borrowing money, or “utang,” is commonplace in the Philippines.

The “utang” culture has been discussed over meals shared by friends or family and in documentaries.

The Financial Executives Institute of the Philippines found that over 50% of Filipino households surveyed took out loans to buy essential goods, whether from formal financial institutions or informal lenders, like loan sharks.

It’s become such a deeply rooted culture to borrow money and pay loans every month, that—anecdotally—some may feel they don’t know what to do with their excess cash once a loan has been paid, so they make another big-ticket purchase on credit.

Considering that 72% of Filipinos still prefer informal and unregulated lenders over banks, it’s no surprise that the “utang” culture has become a burden for many.

Borrowing money can be used as leverage. However, we must pause and consider how to approach loaning responsibly so it doesn’t become a financial problem.

Living within your means: A crucial financial discipline

Living within your means starts with understanding your financial inflow (income) and outflow (expenses).

You are paving the way for financial troubles if you consistently spend more than you earn. This lifestyle often leads to taking out loans to cover monthly shortfalls, which only deepens the debt hole.

Creating a realistic budget is one of the first steps toward achieving financial discipline. List your monthly income, then allocate funds for essentials like food and housing. Always set aside a portion for savings, no matter how small. This savings buffer can prevent you from borrowing for unexpected expenses, like medical emergencies or sudden repairs.

It’s also helpful to differentiate between needs and wants. For instance, food and shelter are needed, but dining out every weekend or upgrading to the latest phone model is often a want. Practicing restraint in discretionary spending helps you stay on track with financial goals and reduces the likelihood of needing to borrow.

Borrow only when necessary

Borrowing money is neither good nor bad. An “utang” can be beneficial depending on its purpose and how it can strengthen your financial health.

For example, taking out a loan to consolidate debt at a lower interest rate can save money in the long run. Taking out loans from a bank and consistently paying them off improves your credit score – meaning that you can take out higher loans with lower interest rates in the future.

You must consider the “why” of your loan. Is it aligned with your goals, both professionally and personally? Loans can also be helpful when starting a small business, and you need the capital immediately. In this case, despite being a “loan,” it is an investment for your future, even if you won’t see the results immediately.

Still, it’s essential to ask yourself the following questions before taking out a loan:

• Is this loan a necessity or a luxury? If it is not for a critical need, look deeper into why you would take out a loan.
  
• Is the loan aligned with your goals? Will taking out the loan contribute to you reaching your goals faster?
  
• Can I realistically afford the repayments? Consider your monthly cash flow and whether you can make repayments without sacrificing essentials.
• What are the terms of this loan? High interest rates or hidden fees can make a small loan a financial burden.

The emotional aspect of borrowing

It is tempting to show off your best side on social media, whether that means showing off your travel adventures or concert tickets. We may even use loans to give loved ones expensive gifts. This is especially true for cultural practices at weddings or holidays, where societal expectations can lead to overspending. While it is excellent to prioritize family and community, it is crucial to weigh the long-term consequences of financial decisions.

One strategy to avoid unnecessary borrowing is learning to say “no” to yourself and others. This is easier said than done, but you must weigh the cost between appearing wealthy and being financially sound.

Breaking free from ‘utang’ culture

If you’re already caught in a cycle of debt, it is crucial to take proactive steps to break free:

• Create a budget plan: Prioritize paying off your debt immediately. Create a budget that allows you to pay off the debt realistically without cutting back on your monthly needs.
  
• Negotiate with creditors: Some lenders will adjust repayment terms if you struggle to keep up.
• Focus on high-interest debt first: Paying off the most expensive loans can free up cash for other obligations.

Lifeline and not a crutch

To clarify: Taking out an “utang” is not bad. Borrowing money can serve as a lifeline and be leveraged to build wealth. It can also be used to advance your goals if you’re taking out a loan to start a small business or as a downpayment for a house. However, you must always consider the purpose of borrowing money. Remember to loan toward your goals, not as a crutch. You can achieve excellent financial stability by practicing responsible financial habits and prioritizing living within your means.

We talk about this more in our free Earnest e-book.

Disclaimer: This article is for general information purposes and does not constitute formal financial advice. Always do further research before making financial decisions and seek professional advice from a certified personal finance counselor. For more information, read the Earnest disclaimer here.