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.

Marriage and Debt - How to Deal with It

Okay, you are married and you're both in debt.

You are paying for your mortgage, your car loan, your cable, your phone lines, your electric bill, your water bill, your credit card bills and of course your nanny all at the same time. On top of that you need to buy milk, diapers and vitamins for your baby. And of course who will forget the monthly check-up for the kiddo?

You thought you have enough for the bills. You plan pretty well and thought can survive until one of your loans are settled.

But at one point you splurged. You overspent. That was when everything went shaky. You started delaying your mortgage payment, your cable, your water bill, your credit card bills and sad to say including your nanny's pay. The interest in your credit card bills became overwhelming because you cannot pay even the minimum amount required. It became a ticking time bomb.

With all these bills to pay, how are you both going to cope up?

First thing first. The couple need to sit down and talk about their finances. They have to admit that are broke and the need to re-arrange everything should be on top of their priority list.

It is a very stressful situation for couples to have financial problems. More often than not, this is one o the main reasons why couples separate. So before that happens, they need to do something.

Here are some tips I gathered to help couple straighten their finances.

1. The couple should make a list of their debts first. They can arrange them from the highest to the lowest or from the one with the highest interest to the lowest interest.

2. They should decide what debt to settle first. For me it is best to settle the smallest debt first so that the feeling of successful paying off a debt can be felt which can actually drive them to continue paying off the others. In this method, the list should be arranged from smallest to highest. Then they have to determine how much is the minimum payment for all their debt. Then the smallest debt should be paid a little higher so that it can be finished sooner. After paying off the smallest, they need to go to the next on the list and so on and so forth. After each successful payment, don't forget to celebrate a bit so that you'll really have the feeling of success. (But please DO NOT SPLURGE.)

3. Look at your house. Inspect all your things. Are you accumulating assets or liabilities? Is your house full of junk that just lie on the floor or on your cabinet? Well it's time to let go of all the things that you don't really need. Have a garage sale on your yard. Invite people and neighbors to look at your yard sale and make money out of your trash. You can also learn ebay.com and sell stuff there. Remember, your trash can be someone else's treasure. The money you'll be making from the yard sale will be used to pay-off one of your credit card bills.

4. Live a simple life. One thing that everybody tends to forget is to live simple. It is just a human nature to want more as your salary grows. But try to learn to curb the want and think with your mind not with your heart. Most of the times, people commit mistakes when they think emotionally. And mind you, emotional thinking tends to make you spend more.

5. Do not mind what other people will say. It's your life not theirs. Why bother what other people will say. Will they help you when you tell them you need money? I think not.

6. Find ways to lessen your expenses. Find a house that suits your budget. Use public transport from time to time. Skip the soda and switch to water. If you can live without a cable connection then do so. If you can maintain connectivity by dropping the broadband connection then do so. Hand wash your clothes once a month and hang them to dry. Plant some vegetables in your backyard. There are actually tons of ways to lessen expenses. It all boils down to what things you value more

7. Don't forget to smile and pray. With a little bit of determination and strong decision making you will eventually climb up the pit of debt. So don't forget to smile and pray. Don't let depression overpower you. Don't let self pity put you down. Every problem has a solution. You just have to hang on.

~Till then

Credit Card Debt

You might wonder why I don’t discuss much about credit card debt in my blogs. That’s because I don’t really have anything to discuss about it. As much as possible I don’t want readers to incur credit card debts.

But still I feel the urge of giving something to you regarding this matter.

I have lots of friends who are digging themselves into credit card debt. They treat it as an easy way to get money. They have the motto “I want it NOW!”

But then one will realize that getting yourself in deep debt is a burden physically, emotionally and psychologically.

Here are a few steps to follow to avoid irresponsible consumer debt.

1. Do not use cash advance

The cash advance is there to mindset people that they have cash and it's ready to be splurged. Once you get the cash advance, the interest starts to tick.

2. Do not max out your credit limit if you cannot pay it in full on cut-off date

Use your card good as cash. Pay everything on or before the cut off date.

3. Avoid unnecessary expenses

4. Do not carry your credit card when you intend to shop

Most of the times people overcharge themselves because plastic is convenient. Oftentimes they miscalculate.

5. If you have an outstanding credit card debt, DO NOT borrow anymore.

Settle your debt first. Stop the urge.

6. Compute

Oftentimes people forget to compute. Your cellular phone has a calculator. Use it.

7. Pay On-time

Debt and the Worst Case Scenario

Have you ever experienced a time in your life where you are afraid of your ringtone or your doorbell? How about opening your credit card bills? If this is true then you definitely have a problem with debt.

Many people unknowingly dig themselves into deeper debt each day especially those who cannot control their purchasing. A good example is Rebecca Bloomwood in the movie “Confessions of a Shopaholic”. You may not have 12 credit cards in your wallet but maybe you have the same attitude. Rebecca simply doesn’t think of the future. She spends through her credit cards until there’s no more to swipe. And then here comes the collector whom she labelled as an “enemy”. She doesn’t answer his calls nor open her door when the collector comes to visit her. Worst thing, she doesn’t care how much she’s spending in spite the fact that she cannot pay her bills anymore.

How can someone realize she’s putting herself to jeopardy when she’s at the height of a spending frenzy? Will she realize it when the collector comes to her house because she’s not paying her bills? Will she realize it when her credit cards have been cut? Will she realize it when she cannot even pay for the minimum amount required? I don’t know. But one thing is for sure. She will be stressed and at times cannot sleep because of it. She will have an unpleasant life because she will hide from her creditors all the time. She may even hide from friends because of humiliation.

In order to address the problem she has to accept that she’s in deep trouble. A decision should be made and then action follows. It is indeed very difficult to accept, decide and act because she will be turning 180 degrees from what she has been doing. But she has to face that difficulty in order to succeed. She may seek counsel from a professional financial planner or a psychologist maybe to correct her notion about shopping and spending. She may even have to endure the stress of not swiping her cards and agree with saying “cash is king.” A lot of work to do and she better get started for time runs fast and doesn’t wait for anyone.

~Till then

Debt

It’s 7 in the morning; an old lady about 40 years old is looking for my mother to settle the payment of my mother’s debt. This is one of the scenarios I remember every time debt comes to my mind. There are times when my mother hid from her creditors because she did not have the money. Most of the time, my mother’s creditors went home without a dime. After the third try, they were already furious saying nasty words about my mom. If only I have a lot of money, I’ll pay my mother’s debt. But I don’t. (A story from a blog reader.)

A lot of Filipino families experience the same when it comes to debt and finances. More often than not, money is the main problem. Because of lack of money, families fall down, tear apart and separate. Some of my friends have the same fate as the blog reader. I hope the opposite is true for you.

~Till then

I Owe Some Money, What Now?

It is uncommon for people who are into personal finance to talk about their debts. As much as possible, people from this field should look clean in the eyes of the people they deal with to gain a good reputation. But today, I have a confession to make. I owe money. It’s a big amount of money and it has interest.

I found a company that lends money for a minimum interest of 4% per annum. I grabbed the opportunity to borrow and put the money in my investment. What is 4% if it can give me a minimum of 12% in a year? That is still 8% gain.

Sometimes we miss opportunities because we fail to look into the possibilities. I am not really recommending what I did. A lot of you might have the wrong impression of borrowing money to invest. Let me reiterate. I borrowed money at 4% interest and put it at 12%. The gain on my investment is higher than the interest of my debt. I am a long term investor and I never trade. I don’t play it safe, I play it smart.

~Till then.

Getting into Deep Debt

from the book Nice Girls Don't Get Rich(Lois P. Frankel, PhD)

This is one of the most fatal mistakes a person (not only girls) can make that can ruin the road towards abundance.

Having a credit card is almost inevitable especially if one treats it as an emergency fund. But this plastic can be your vehicle to poverty.

How can a woman get into so much debt?

I'll share to you some reasons in the book Nice Girls Don't Get Rich.

1. Making lost time with material things.

Giving expensive gifts to a person doesn't necessarily mean you love them more.

2. Envy.

It's not because everybody has it, you got to have it also.

3. Live today and let tomorrow worry for itself.

If this is your motto, you'll really find yourself in big trouble.

4. Impulsiveness.

Control your emotions so that you can control your money.

5. Appearances.

You will not die if you will not have that fancy car or that expensive dress.

Coaching Tips:

1. Always be conscious where your money goes.

2. If possible, get rid of the card if you cannot control yourself.

3. Be contented with what you have.

image from: http://drscoundrels.com/wp-content/uploads/2010/05/debt.jpg

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