Break free from personal debt
DEBT is one of those things in life that can be seen as good or bad. It’s good when it’s used to invest or purchase things that give a higher return than the cost of borrowing (interest). It can be seen in a bad light when it becomes so big and monstrous that you can’t seem to handle it anymore.
Tips to manage and break free from your personal debt:
The truth is, you have control over the amount of debt you get into. If your debts seem enormous and daunting, try these tips to manage your debt and get out of that rut:
Keep control of your cash flow and plan ahead.Regularly keep track of your expenses and money inflows. If you see that there is a need to get a loan a month from now to fund necessary expenses, shop around for a loan with the best terms: affordable payment scheme, low interest, and minimum charges. You can go to banks, savings and loan associations, or the Social Security System or Government Service Insurance System for your loan needs.
Avoid making short-term debt a long-term habit.Pay off your short-term debt as soon as possible then be more disciplined to avoid going into unnecessary debt.
Protect your credit history.Pay on time or even ahead of the due date for your loan or credit card accounts. When you have a good credit history, banks would lay out the red carpet for you the next time you apply for a loan. You may get better deals and more flexible terms.
Use debt constructively.Apply for a loan to finance projects or purchases that would give you a higher return than the cost of borrowing. Examples would be borrowing to finance your own home, your own business, or higher education for you or your children. Also, avoid borrowing to get into high-risk investments. This may be an extreme scenario but you might end up with just the clothes on your back and still be faced with the bill to pay off your loan.
Evaluate whether you need to go into debt or use cash.If you want to buy a new car, for instance, weigh the pros and cons of buying in cash versus going into debt. If you calculate the total amortization (including interest) for the whole period (three years or more, according to your loan payment period), you might be shocked at the figure. You might be better off buying a good secondhand car in cash, or holding off buying a car at all until your income gets better.
Ask if you really need it.Ads for “good deals” on consumer goods, cars or vacation houses may be very enticing. After all, the financing scheme offered may sound reasonable at first glance. But avoid impulse buying. Ask yourself first if you really need to buy another TV set, car or vacation home, and if you have the funds to pay it off should you get a loan.
Tighten your belt.Not only do you need to avoid impulse buying, you need to avoid unnecessary expenses as well. Examples would be taxi fares when you could take the MRT or carpool, gourmet coffee every day when you could brew your own coffee in the office or at home. The amount that you can save can be used to pay off your loan – or at least a chunk of it.
Grow your income.Look for a sideline you could get into, or other similar opportunities to increase your income. Then use the additional income for debt payments, not for splurging.
Did you know…
…that borrowing for the long term is cheaper than borrowing for the short term? Interest rates for housing loans may thus come cheaper than short-term personal loans or credit card debt. This is why the book The Citibank Guide to Building Personal Wealth advises readers “not to use short term loans to pay for long term purchases; not only is this very expensive, but you could have difficulty in paying off the short-term loan or refinancing it when it becomes due.”