When it comes to money, it’s difficult to talk about debt. Many Filipinos have bad experiences managing debt, whether they’re lending or borrowing. Many are caught in a cycle of debt due to irresponsible financial management, predatory lenders, or a combination of both.
But debt doesn’t have to be scary. You just need to know the suitable types of debt to incur and how to manage them properly.
When managed well, debt can improve your productivity and quality of life. Save yourself from the vicious cycle of debt by following these six rules:
Understanding the difference between good debt and unmanaged debt spells the difference between using borrowed money to improve quality of life and being trapped in a vicious cycle of unmanaged debt.
Let us discuss in depth the rules on how to manage debt effectively:
Avoid borrowing to invest due to risks
For most people, borrowing to invest (also known as leveraging) can be very risky. If your investment doesn't perform well, you could have debt and losses, leading to financial trouble.
Some experienced investors, particularly in real estate or the stock market, may borrow to invest when the potential returns are expected to outweigh the cost of borrowing. This approach carries a higher level of risk and should be considered carefully.
Most people should avoid borrowing to invest due to the risks involved, but in specific cases, with careful planning, it could be a calculated decision.
It’s also important to understand that investing means using your money to purchase assets that grow in value over time. Investments like stocks and bonds have different levels of growth potential. However, they all have one thing in common: uncertainty. In general, the higher the uncertainty, the higher the growth potential.
On the other hand, debt is very predictable. No matter what happens in the stock market, you must pay your dues if you have a loan. Running a race between the interest on your loan and the growth of your investment is an almost surefire way to lose money. This is why it is risky to borrow money so you can invest.
Instead of borrowing money to invest, saving up and building an emergency fund before you even think about investing would be better. Once you have put enough money into a sizable emergency fund, you can then start putting money towards investing instead.
Using your credit card wisely to manage your money
Before you borrow money, ask yourself where the money will go first. Whether it’s a loan or a credit card purchase, always use it for something that benefits you.
For example, you take a home loan to purchase a condo unit near a business district area. While it may be expensive, it also provides several benefits. Chances are that your employer is in the business district. Living near your place of work takes away the stress of commuting, especially if you can walk to your office. Besides spending less on transportation, you also do not have to spend as much time commuting. This gives you more time for rest and recreation, thus significantly improving your quality of life.
But what if you don’t have to work onsite? Here’s another example: you purchase a brand new laptop using your credit card’s installment plan so you can work remotely. With a stable internet connection, you can be productive and do your housework alongside your job. You also can manage your cash flow, allowing you to make this big purchase with the intent of repaying after.
Settle your credit card bill right away
Every time you settle your bill on your credit card, you build your credit score. This tells your bank that you are responsible for paying the money you owe. Having a good record of managing your credit card payments would likely improve your loan applications in the future.
To ensure you know how to manage debt effectively, you should pay off your credit card bills in full every month so you don’t get charged late fees or interest. Paying the minimum amount, for example, will mean that interest will be charged on top of your payments.
If you have racked up unpaid credit card bills, develop a system to pay them off, in full and on time. Start by computing how much you owe. See if you can pay off everything. If not, focus on paying off those with the highest interest rate or the most considerable amount first. Either way, the idea is you want to minimize the growth of interest.
Borrow only from legitimate and credible institutions you trust
The promise of quickly getting cash for things you want is always, and many lenders take advantage of this. Some lenders claim you can borrow money in a matter of hours, with just a government ID as a requirement.
Always be skeptical. Borrowing money has a cost, be it in interest or a collateral. That’s why you should only trust established institutions with proven accountability.
Institutions, such as banks, government institutions, and legit lending companies have reputations to protect. They may be slower in lending money. This is because they take the time to gauge if you have the capacity and the ability to pay back money you owe. While this due diligence protects them from bad debtors, it also prevents you from borrowing money you can’t pay back.
Know your risks and responsibility when taking on debt
Having debt is something you must live with over a long time, so make sure you know how to manage your debt.
Know what you’re getting into: Understand how much interest, plus penalties, you must pay if you miss a payment, and if the interest rate changes at some point. Check if your interest is charged on specific periods, like monthly or annually. If it requires collateral, be aware that there are many scenarios where you may lose it. The last thing you want is to pay for a house or a car that’s taken away because you default on your debt–or you fail to pay what is due including interest.
Budget for debt repayments
Make sure you budget for debt repayments. Allocate a portion of your income to pay for monthly amortizations, for example. Of course, make sure you have a stable source of income, such as regular employment or a profitable business, to help fund your payments. If you lose your job, what are your options? Will you still have a means to pay, or will you be forced to use your savings or emergency fund? If you default on your debt, are you willing to cash in investments? It’s good to be prepared, so you plan for any contingency. One way to save money to repay your loans is by learning how to live within your means.
Debt is a double-edged sword. It can help you manage your money and fund big purchases. But if not managed well, it could spiral into a huge and expensive bill when the interest starts to compound. This can make it harder to pay off money you owe and can impact your credit score.
By managing your debt, you can build your credit score, and allow you to take on more loans in the future. Unmanaged debt, on the other hand, takes a toll on your physical health. Learning how to manage your credit card and other types of debt can help improve your financial health.
Managing debt is one way to achieve financial wellness, which is a state where you’re free from financial worries. Being financially well means that you can save for emergencies, invest in your future, or spend on things that bring you joy. By keeping your unmanaged debt in check, you can put more resources and energy into achieving your financial goals. Managing debt helps you avoid sleepless nights, and worries that can affect your mental health.
You have the power to manage debt. Loans and credit cards in the Philippines are available to you, so it’s up to you how you’re able to use these financial tools to better manage your money.
It’s important to understand what kind of debt you’re getting into so you know what you need to do to keep it in check and ensure that it propels you toward your goals.