Friday, February 24, 2012

Lessons of Debt

It is a very common practice for Filipinos to loan money to buy things especially big purchases like a house and lot or a car maybe.

As for incurring debt, three lesons have been shared.

1. It always depends on the purpose. If the purpose is wrong, debt is bad.
I remember a qoute told by David Ramsey thatngoes this way, "We buy things that we don't need with money we don't have to impress people we don't like." If you think you fit this qoute then i think you have a problem.

It is not bad to be ahead of everyone. It is not bad to have things. But if you accumulate things the wrong way, i am 100 percent sure that you are going to dig yourself deeper and deeper until there is no more space for younto breath.

Lesson: "Do not keep up with the Joneses. Who are they anyway?"

2. Size of debt versus income matters.
Think of it this way. You are applying for a loan and your records show that you are paying your bills on time with instances of paying more what is required in your credit card. What is the probability that the bank will lend you money? Actually it is high.

On the other hand, if you are so indebted and your debt is close to your monthly salary then the probability is very small. The bank analyzes cashflow. The mere fact that your debt to income ratio is closer to 1 signals a red light.

3. Debt Management Approach
Paying debt requires financial management. It requires discipline. You cannot depend on other people. It is you who is responsible. Start managing your debt or your debt will begin to manage you. The smaller your debt the more cash will be put to your bucket and the faster younwill achieve financial independence.

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