Debt Management, 2nd Step to Financial Security

First of all thank you for your continued effort in reading our blog in order to be financially literate: The 2nd in the list among the 6 Financial security Steps is Debt Management.

It is clear that you cannot invest if your are buried in debt.. But did you know that paying your debt is the start of your investment. Because the moment you pay your Debt, interest stop so as if, you have already save those interest that you are going to give to loan institution.

You should know that there are two types of DEBT, first is Good Debt and the next is the Bad Debt.

So What is Good Debt? Good Debt is a Debt that could lead to increase in cash flow, as an example you made a loan in bank to buy a car that could be used for your business or taxi. You made a 5% interest in the bank, but you are sure that your gain will be more than 5% from your business. It will automatically increase your cash flow. So that is Good Debt.

So What about Bad Debt?

Bad Debt is something you buy in debt, but only because you want those things. When I say “want” it only means something that you can live without. As a sample a DSLR camera, I categorize it as want because you can live without camera. Not unless you are a photographer and you need for your business so it could become a “need”.

As a piece of advise if you are in debt through Credit Card, and you decide to be financially free, make payment in your credit card debt monthly but always more than the minimum. And stop using your credit card. Remove it from your wallet and put it in your cabinet.

Credit Card is a temptation whenever it is positioned in your wallet.

Credit card is good if you know how to handle it. But if you don’t, better cut it out and pay your debt.

If you want to get out from Credit Card Debt, You always need to pay more than the minimum and stop using your credit card.

Pinoy Money Mistake: Credit Mismanagement.

This is Part 2 of 3 of the Money Mistakes Among Pinoy Series

Part 1 | Part 2 | Part 3

After Discussing the First Pinoy Money Mistake about Overspending, This blog post will discuss about Credit Mismanagement.

Credit Mismanagement is brought to you by your Personal Loans, Credit Cards, Mortgages

According to Market Manila 2011, Southeast Asian Central Banks 2008: Philippines has 28% of total household debt in the form of credit card loans.

I believe this is true, I was once buried in credit card debt. Most of Credit card users, used their credit cards for “WANTS” and needs, there is a wise spending technique in using credit card.

Use your credit card, if you can fully pay the card before it’s deadline. Because the moment that you pay minimum, you are already in Financial problem. Enjoy the perks that you can get from the credit card like bonus points but don’t be buried with debt with credit card or else you will suffer the consequence of having a compounded monthly interest to your credit card.

Using the compounded formula as an example if you have a 10,000 debt and you did not pay for your debt in one year, your debt will be affected with compounded interest as follows:

Given : @ 2.5% Interest Monthly

10,000 x 1.025^12 = 13,448

Imagine your wants today could increase to a nightmare on the following years if you will not use your credit card well..

So today’s take.. Use your credit card wisely.. But did you know that you could reverse that compounded interest if instead of buying your wants is Investing you hard earned money.?