Smart Pinoy Investor: Usapang utang

In some of my previous blogs, I've shared about the importance of improving one's cashflow which is one good step in doing proper personal finance management (How to Increase your Cash Flow)

In this post, we'll read about an equally important second step - getting out of debt (if you have any).

Below excerpt is taken from one chapter of Efren Ll. Cruz's simple but powerful book Pwede Na! - The Complete Pinoy Guide to Personal Finance (2010 edition). Grab your own copy as I think it's a good reference and comprehensive guide for anyone starting to draft one's financial plan.

Happy reading!

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All of us come face to face with the allure of debt, particularly consumer debt. But please don't get me wrong. Credit can be a tremendous tool, especially when used as leverage to earn more assets. It is, however, the misuse and abuse of debt that leads to trouble.

Debt problems can be harmless at first. Take the case of credit cards. Credit card companies give pre-approved credit with the joining and annual membership fees for the first year waived. Telemarketing companies are even set up to promote credit cards and credit card products. Then you say, "Oh I'll just keep it for emergencies." Most likely, you would have opened Pandora's box as emergencies will take on a new meaning.

Emergency lunches at the newly opened Italian restaurant can easily be rationalized. Then you wander through the mall and find that items on sale become emergency purchases. But you say that you will pay off the charges in full when the credit card billing comes, or so you think. Before you know it, you would have racked up so many charges that you are only able to afford paying the minimum amount.

Taking Stock of Your Debt

Managing debt is much like trying to lose weight. The first step is to see how much you currently weigh. Managing your debt also requires that you know how much you owe and what kinds of debt you need to pay.

You should classify what you owe by when they are payable. The simple reason for this is that you need to know if there would be enough cash to pay for a certain debt when it falls due. Just lumping your debts under one total will not make good financial planning.

Types of Debt	Short-Term	Long-Term
Personal Loans	X
Credit Card Debts
Straight Purchases	X
Deferred Payment
Payments due in < 12 months	X
Payments dues in >12 months		X
Car/Housing Loans
Payments due in <12 months="" span="">	X
Payments due in >12 months		X

In addition to classifying debt by maturity, you should also take a good look at them to see which are necessary and which are not. Moreover, you should "cost" your debt to see which have very high interest rates. Usually, consumer debts (i.e credit card debts, personal loans) are the ones that are more expensive in terms of interest rates. You should get rid of debt you don't need as well as those that cost too much.

Lastly, below are some ways to get rid of too much and expensive debts:

1. Consolidate your debt in one or a few lenders who charge the lowest interest;

2. Take out a loan against your home (which charges much lower interest), pay off all your high interest consumer debt, and spread your repayment over a number of years (in contrast to consumer debt that is usually due after a month of contracting);

3. Borrow at concessional rates from your relatives;

4. Sell some assets you don't need and use the proceeds to pay off your (corresponding) debts; and/or

5. Perform a service (needless to say, stick to the legal and moral services while avoiding killing the goose which lays the golden egg - your steady job.)

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Have fun investing (and eliminating your debts),
Omeng

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