Tuesday, October 12, 2010

Debt Trapped

It was January 10. Annie got off the train and walked to the office in her chiffon blouse and pencil cut skirt both from Zara. She wore a pair of Ferragamo shoes and carried a Channel bag held tight avoiding almost all passengers fearing a snatcher would take it away. She was so disgusted by the traffic in the train station because her hair-do got messed up. She brushed her hair away from her face and continued walking towards her favorite Starbucks shop. She thought she couldn’t start a day without her favorite white chocolate drink.

Annie works as the head manager of a giant firm in Makati. Being so, she needs to look great everyday. For her, looking great means having the best things she can have. Why not? Her salary is high.

Upon arriving in the office, her staff greeted her with a smile. Because of the train station traffic she just frowned. She went straight to her area and stared at the pile of papers on her table.

Poor Annie, she thinks she is miserable. Caught in the debt trapped, couldn’t drive any of her cars and couldn’t even pay her bills. This explains what a manager of a big firm is doing in a train station.

Let us take a look at her life style and check what is going on.

When she was promoted as the head manager, thoughts came to her that she should live the life she thinks she deserves. She bought a condo unit in one of the finest places. Paid the down payment from her signing bonus as a manager and is currently paying for the amortization. She lives alone in her condo full of electronic gadgets and accessories. She has a 2-door fridge full of junk foods and left-overs and has a very expensive electric stove used for frying only. (She doesn't know how to cook) She owns a microwave that she often uses to heat up foods from her fridge. While eating, she loves to watch movies from her flat screen television. While sleeping, she loves to listen to her favorite music from her iPod. She has a centralized air-conditioning system, a dishwasher, a fully automatic washing machine, a hot and cold shower and three cellular phones. She thinks she doesn’t have spare time so she hires a helper every week to clean the house.

In addition to her condo amortization, Annie is still paying for her Honda Accord and Toyota Fortuner. The Accord is half paid while the Fortuner has just started. Every single appliance she has in her condo was paid through credit cards and she is paying minimum amount every month. She maintains five credit cards and almost all of them reached credit limit already.

Let us take a look where her salary is. Since she lives alone she converted one of the rooms as a walk-in closet. Three cabinets are full of clothes – used and unused. There is also a cabinet dedicated for shoes and another cabinet for bags. She also has an array of accessories. Watches of different sizes, rings of different stones, necklaces of different ornaments and a lot more. Every single piece in the room is signature that is why she calls this room the “investment room”.

January 9, bills came from the electric company and water provider. She has to pay 10000 pesos for electricity and water consumption. She doesn’t even have 5000 pesos in her payroll account. Where in the Philippines will she get 10000 pesos for the bills? She is ashamed to borrow money from friends because all along she pretends to be rich

Question: What causes Annie to be in so much debt?
Answer: It is actually the way she thinks.

Nowadays, people in the society feel there is a need to upgrade lifestyle everytime salary upgrades. Look at what Annie did. She immediately accumulated things she thinks she needs after being promoted as GM.
Let us discuss one by one the mistakes Annie did in her financial life.

Bought a condo unit that is way beyond her means.
Before signing a contract, make sure to compute your cash flow first. Just because Annie wants to stay at the limelight, she thinks a posh condo will make her shine more. Think 10 times before owning one. Or better yet, live within your means.

Bought a new car even if the old car is not yet fully paid.
Annie should have thought about “One at a time” principle. Paying a condo and a car is heavy already. Having another car is too much. Maybe Annie was thingking that having a bigger car is better for out-of-town trips. What she did not realize was she’s putting her financial status at the brink of devastation.

Accumulated so many clothes and accessories.
They say a lady always wants to shop. I say, “So true.”

But a lady can always choose what to shop for. A very common mistake for ladies is the high tendency to shop whenever they feel excited or depressed. (By the way, the writer is a lady.) Annie should learn how to discipline her self and to control this tendency.

Too many credit cards.
In the movie, Confessions of a Shopaholic, credit cards are synonymous to magic cards. They actually are magic cards because they can magically fool you to spend more and more and can magically increase yoyr debt tremendously.

What Annie needs to do is to rank her cards from 1 to 5, 1 having the highest interest rate. All she has to do is simply pay off the debt from credit card number 1 first and then number 2 until all the cards have been paid off. Best thing to do after paying everything is to maintain just 1 card and pay debt before cut off period.

No savings account. (I only mentioned the payroll account)
Annie has to learn the fun way of saving money. She always depends on her salary and on her credit cards. It’s time she focuses some of her attention to saving money and eventually on investing them. Ooopppsss. Not on material things but on real investment facilities such as mutual funds or stock market.

Did not try to balance her in-flow and her out-flow.
As you can see from Annie’s spending habits, she was not able to balance her salary and expenses. This is crucial. If Annie wants to have a worry free life then she has to take time to study about finances and apply the concepts. She should always bear in mind that having big salary is good but managing the big salary is better.

Disclaimer: This story is written for illustration purposes only. ^_^

~till then

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