Getting Into Debt The Right Way
Debt is good when it is used for things that have economic return and bad when used to finance necessities that turn out bad.
In all economic stages, debt or credit has been part of the movement toward the economic growth of the nation. We cannot deny that the majority of us Filipinos use debt as a tool to attain something important. In major cities and urban areas, debt is used as a vital tool for business expansion and growth. If you notice, Asset = Equities + Liabilities. Therefore, since debt is part of liabilities, debt is essential to hasten the growth of the company or the nation. Debt is a means to generate money and a sensible means of funding a business. It is also one of the top reasons a company or a nation may default, which means their cash flow is inadequate. Personal finance has taught us the principle that in order to have a good and healthy cash flow, one should live within one’s means and spend no more than one’s income.
When to use Debt?
The best time to use debt is when you try to add more funding to your growing business, building your home, purchasing your vehicle to use for your business or work. Allow me to provide more details on these. Funding a business is one of the best ways to use debt because you are using it to grow your asset. Some corporation would even set up their funding 50/50, or 50- percent debt and 50-percent equity. Second, in building your home, this is one of the better ways to use debt. A tangible asset that would shelter your family that you can sell or rent at a good price as and when needed. Third, using debt to purchase a vehicle is another way because private transport helps you save time in going from one place to another in doing your job. Also, most financial experts advise against using credit cards. My advice is to get one and use it as a backup or for emergency purposes.
Guidelines in using Debt
- Before you get into debt, ask some important questions to yourself: Do I really need this debt? Will this debt benefit me? Will this increase my asset? Will this make me a better person? Does my family really need this debt? Can I pay off this debt?
- We can always follow the written guidelines from the oldest book, the Holy Bible. Proverbs 22:7—“The rich rule over the poor and the borrower is the slave of the lender.” Thus, remember that you need to repay your debt so as not to be a slave.
- Do not spend money that is not yours, on things that have no economic return. Live within means. Your debt should be no more than 20 percent of your monthly income after tax. Do not buy signature clothing through credit cards if in reality you cannot afford to pay cash. My simple tip for this is, if you like to buy a flat-screen TV costing P30,000 with zero-percent interest for six months instead of using your card, try saving the equivalent of the six monthly payments to see if you really can afford the price. If not, then no worries, because you have saved yourself from interest charges on late payments and you may then use the savings to purchase a cheaper TV.
- In personal finance, the cure has always has been about spending less than your earnings to avoid bad debts. All financially successful people do this time and again. As Warren Buffett says about spending: “If you buy things that you do not need, soon you will have to sell things you need.”
- If you use credit cards, use them only as a backup for emergencies.
- Humble yourself if you are having trouble about debt. Seek professional advice from financial professionals.
To conclude, debt is good when it is used for things that have economic return and bad when used to finance necessities that turn out bad.
Serge Bargayo is registered financial planner of RFP Philippines from Cebu City. He specializes in Personal Financial Planning who help individuals (especially breadwinners) mapping customized solutions for their financial puzzles and achieve financial peace.
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