Debt is a sensitive topic and one of the most prevalent problems of many adults; for some, it can even be crippling. Though getting into debt may seem normal, it doesn’t have to be.
It’s also sad to read in forums that many people in debt are more concerned about what will happen if they don’t pay their debts rather than finding ways to pay for them.
Being debt-free is one of Dave Ramsey’s 7 Baby Steps, and he clearly emphasizes it because our choices are limited if we’re in debt.
Being debt-free will also give you the mental peace of not looking behind your shoulders for your creditors.
The rich rules over the poor, And the borrower is slave to the lender.Proverbs 22:7
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Good Debt vs. Bad Debt
There has been a long-standing debate regarding good and bad debt advocates versus no-to-debt advocates.
For good debt vs. bad debt, good debt is a loan that has a long-term benefit and can be an investment as it appreciates over time. Examples are business loans, mortgages, and even student loans.
On the other hand, bad debts are debts that don’t add long-term value or only depreciate over time, like high credit card payments for clothes, electronics, and consumables and high-interest loans.
Then we have debt-free living proponents, famously advocated by Dave Ramsey. This states that people should avoid debt at all costs because there is no good or bad debt, only debt. It says that a debt-free life is free from financial burdens.
Common Causes of Debt:
1. Low Income
The most common reason people get into debt is because their expenses are much greater than their income. When this happens, many people’s jerk reaction is to take out a loan.
For instance, with the ever-increasing prices of essential goods because of inflation but a rarely-increasing salary, a loan can sometimes be a means of survival.
2. Emergency Expenses
If you suddenly fall into an emergency, be it for yourself or your family, and you don’t have an emergency fund, then you will surely fall into debt. That’s why it is crucial always to have savings for the rainy day.
3. Poor Money Management.
Another common reason people fall into debt is poor money management and money-wasting habits.
This happens when you prioritize spending your income on your wants over your needs, then become pressured when the deadlines come, resulting in a loan.
Vices like smoking, drinking, and gambling are also included in poor money decisions because they are addictive and destructive.
4. Peer Pressure and FOMO.
Peer pressure and the fear of missing out are other causes of debt. Due to a person’s desire to be like their peers by buying the latest trends, gadgets, or vacations, even if they don’t have the money to spend, they will resort to debt.
5. Unsustainable Consumer Debt.
Consumer debts include personal loans, credit card debts, and high-interest car loans. If not properly thought out, these consumer debts can lead to more future debt.
Also included in consumer debts are salary loans and online lending apps that can be predatory and put you deeper into the debt cycle.
6. Business Loans and Mortgages
For those who believe in good and bad debt, they identify a business loan and their house mortgage as good debts and a long-term investment.
However, there is a caveat, especially on business loans. It is better to take out business loans for expansion instead of going into debt to start a business since a new business’ survival is very low in the first five years.
7. Student Loans
Unlike in developed countries like the US, student loans are yet to be prevalent in the Philippines. While some believe student loans are a great opportunity to invest in education, this has not been the case historically.
If we look at the US, there are people in the late stages of their life who are still dragging their student loans because their degrees didn’t bring them a high enough salary to settle their student debt.
8. Co-borrowing/ Co-makers/ Guarantees
Don’t agree to guarantee another person’s debt or put up security for someone else. If you can’t pay it, even your bed will be snatched from under you.Proverbs 22:26-27
Becoming a co-maker or guarantor for another person’s loan is another common cause of debt. This is also one of the worst kinds of debt because the loan proceeds are not yours.
For instance, you become a co-borrower of a car loan, salary loan, or housing loan. What benefit would you get from becoming one?
When you become a co-borrower of a loan, you share the responsibility of paying it even if you are not the beneficiary.
Several people became co-borrowers for loans and were forced to pay the debt after the original debtor suddenly stopped paying, resulting in a broken relationship.
Responsibilities of a Debtor
1. Pay your debt.
The wicked borrow and never repay, but the godly are generous givers.Psalm 37:21
The reason why I don’t usually lend money is because I know people’s tendencies of not paying. If you’ve read my previous post about lending considerations, I mentioned that your mind would be more at peace if you don’t lend money.
I remember a story about siblings who never paid their debts to each other because their parents taught them that if their siblings owed them money, think of it as a gift to them. Unfortunately, this practice lets people off the hook and avoids accountability.
I think we all know some families and good friends destroy relationships because of unpaid debt, so if you’re the debtor, please pay your debt.
2. Stand by your word.
Another important principle for me is to stand by your word because it shows integrity. This includes debts.
For instance, if you say you’ll pay your debt on your next payday, you have to pay it on that day. But if it gets delayed, you have to say it immediately.
Unfortunately, the funny thing about many debtors is they are usually nice when asking for money but are like rabid dogs when you ask for it in return. So if you know you can’t commit to a date, don’t put false hopes on your creditor.
3. Don’t Involve Others in Your Debt
This is another principle many people need help understanding. If you take out debt, then you should pay for it yourself and don’t involve other people to pay for your debt.
I heard some stories of people telling their lenders about waiting for another person to pay their debt before they can pay them. It is a vicious cycle because it will be a waiting game, and people will get frustrated and angry.
Also, as a debtor, you should never force your parents or children to carry the burden of paying your debt. Take accountability and responsibility for your actions.
Debt Repayment Strategies:
If you’re in debt, don’t lose hope because there are many ways to settle them. However, accomplishing it will take a lot of effort, time, and energy.
Here are some common repayment debt strategies:
Repayment Strat #1: Debt Snowball
When using the debt snowball, you will pay your debt from the smallest to the largest amount, regardless of the interest rate, while paying only the minimum for the other obligations.
Afterward, use your freed-up money to pay the next smallest debt and build momentum to pay the succeeding debts until you paid for everything.
The intent of this strategy is for you to gain confidence after every small debt you knock off, which is a way to change your mindset and lessen your debt anxiety.
This is the debt-repayment method that Dave Ramsey and other financial advisors usually advertise.
Repayment Strat #2: Debt Avalanche
Unlike the debt snowball, where you will pay the smallest to largest amount regardless of the interest rate, the debt avalanche tells you to pay your debt from the order of largest to lowest interest rate while still paying the minimum payment for the other loans.
After paying the loan with the highest interest rate, you will use the freed-up money to pay the next highest-interest debt while building momentum and confidence to pay off the rest of your debts.
Remember that being debt-free is a liberating feeling, and it opens up more options for us as we move forward in our middle adulthood.
Repayment Strat #3: Debt-Consolidation
The idea of the debt-consolidation is to take a single larger loan to pay off your other existing loans.
Though it seems like a good deal because you will only have to pay one debt instead of many different debts, there can still be drawbacks, like fees and a higher interest rate.
The third strategy is something that I don’t subscribe to because you are only getting into a larger debt to pay off all your other debts.
Repayment Strat #4: Self-Deprivation
I know – self-deprivation is a harsh word. However, if you’re in debt, especially since it’s your fault in the first place, then as an adult, you need to face the consequence.
During the period of self-deprivation, you will need to use the money you saved to pay your debts. Remember that debt repayment is a numbers game. The more you pay, the faster you’ll be debt free.
We all know people in debt who will not think twice about buying new clothes or booking a new travel destination but will try their hardest to avoid paying their debt.
Then they will say that they deserve to have nice things and enjoy life. However, they fail to recognize that the people they are indebted to also deserve nice things. Honestly, they deserve it more than you at the moment.
What To Do While Paying Your Debts
1. Build your starter emergency fund.
Just because you’re paying focused paying your debt doesn’t mean emergencies will not arrive. This is why you should still have an emergency fund, no matter how small.
A starter emergency fund is only P10,000. You need to build this amount while still paying for your other debts so that you will still have some peace of mind for when emergencies come – because they will.
2. Communicate With Your Lenders.
Unknown to many, but many [legal] financial institutions would be happy to negotiate with your debt repayment plan. But it would be best if you first communicated with them.
Similarly, if you have debts to your friends, families, and other lending institutions, you need to be honest with them and promise to pay them back while asking for further consideration.
When dealing with debt, communication is crucial because many emotions are going on (especially from your friends and families) when people don’t get their money back.
3. Avoid Getting Into More Debt
When you are in debt and can’t seem to crawl out, the instinct of many is to get into more debt to pay an existing debt. Unfortunately, this is not the best idea.
If you’re borrowing from Lender C to pay Lender B to pay Lender A, then you are like running your own little Ponzi scheme, which will not end well for you.
4. Find Expenses Where You Can Cut Back
One of the best practices when paying off your debt is to cut back on your regular expenses.
For instance, if you are contemplating whether to add your P10,000 bonus to your investment or to pay your debt, it should be fairly obvious that your responsibility is to pay your lenders first.
Remember that if you’re in debt, your lenders deserve it more to get their money back than for you to increase your holdings. Also, it is your responsibility to pay your debt in the first place.
5. Look For Other Sources of Income
Cutting back on your expenses can only do so much until you’re dried to the bone and can’t find any more costs to reduce. When that happens, you have no choice but to find another source of income.
Another source of income may be a side hustle or a new job. Regardless of your choice, the added income should go straight to your lenders.
Debt is a sensitive topic in our community because unpaid debts have the power to destroy relationships and lives.
So if you’re someone in debt, you should communicate and immediately pay your debtors, regardless of whether you have an agreement.
Don’t be like the debt addicts who only borrow with no intention of paying while laughing smugly about their “free money.”
On the other hand, if you’re a potential lender, you need to think hard before lending money or avoid it altogether. Many people who lent money to their friends and families are now frustrated and angry because of unfulfilled duty.
Finally, though debt can be a tool for investment, it can also be a tool for financial ruin, especially if you don’t pay it.
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