How to Have a Bad Debt-Free 2017
Whether it’s a credit card company, your parents, your best buddy, or the neighborhood’s friendly “lending guy,” being in debt often carries implications such as blood pressure as high as interest rates and panicky feelings of inadequacy and guilt as persistent as collection notices. Borrowing money is easy but that doesn’t mean you should for just any reason! If your 2016 has been riddled with such stressful situations, then it’s about time you increase your money smarts. We put you on the right financial track this 2017 by helping you figure out in which situation is a debt okay to have, and which ones are just downright impractical.
A debt can only be considered “good” if the value of whatever it is you’re procuring with said debt will increase in value over time, you’d call these assets. This way although you’re in debt, the asset you’ve purchased with it has a value that appreciates faster than the cost of that debt, increasing your net worth.
House & lot or condominium
Not everyone can afford a house and lot or condominium unit upfront. But they’re good investment because a) their value increases over time and b) they can be rented out for further income. The property should increase in value at a faster rate than your loan but if you’re able to rent it out, you can effectively remove the cost of your loan (and possibly profit a little on top of it) while still reaping in the benefits of an appreciating asset.
At present, the country’s residential property market is enjoying rapid growth. According to the Bangko Sentral ng Pilipinas, the first quarter of 2016 saw a 9.2% increase in nationwide real estate price index. The highest increase recorded was for condominium units, which saw a surge of 12.9%. The price for single detached/attached houses rose by 8.1%, while duplex houses and townhouses rose by 6.7% and 8.5% respectively. According to the Global Property Guide these prices are “expected to continue to rise strongly for the remainder of the year, boosted by robust economic growth.”
However, this doesn’t come at zero risk. You will need to do thorough research to ensure that your property’s value does appreciate. These are very large purchases (and as such, debts) and if your asset’s value doesn’t rise, that debt can turn very bad.
Unlike real estate, cars suffer from price depreciation thus are rarely classified as assets. But going into debt to finance your new car is still a viable (and mostly unavoidable) debt to have.
However, with the advent of ride-sharing services in the country, acquiring a vehicle has also become an opportunity to open other income opportunities. Car owners can easily sign up with companies like Uber and GrabCar, while some prefer to offer their rides for private clients. Some smart professionals have taken advantage of such innovation, picking up riders who are going to the same office area or going home back near their residence. This can alleviate the cost of gas and parking and maybe add some more money to their monthly car payments and maintenance cost. Once you’ve purchased your desired car, secure your investment with a comprehensive car insurance coverage. There are a number of reputable car insurance companies in the Philippines. Much as it seems more comfortable to just go with the first one that you chanced upon, you just shouldn’t. Do you research, compare and contrast their products, learn the terms and jargon, then choose.
Buying college plans is a great investment, on some pretty serious real estate—education. It can ease or even take away completely the burden of meeting the tuition fees required by the best universities in the country. Sending your beneficiary (your sibling, kid) to a reputable school will improve their chances of getting a better job or being more competitive in the workforce.
According to the latest Labor Force Survey conducted by the Philippine Statistics Authority, the number of employees who have graduated from college almost doubles the number of people in the workforce sans a college degree. The nationwide survey was done last January, and also showed that the trend exists in almost all parts of the country.
Taking out a loan for that cooking class or MA in some highfalutin course is also considered a good debt. Just like a college plan, it makes you more hire-able and equips you with more skills and knowledge. For those already employed, a post-graduate course can qualify them for a higher position and higher salaries. Since you stand to earn more, you can likely repay that debt right back. You can use our BDO personal loan calculator to find the best terms possible, one that can allow you to study and pay for your loan at a pace that suits you.
The Bad Debt
A bad debt is anything you borrow cash for but does not increase in value; or simply put, anything you bought that you know you cannot afford. It’s all about resource allocation—and if you’re putting these on top of your list then you’re headed to financial quagmire.
Your pleasurable pursuits
Paying a visit to your friendly neighborhood spa for some rest and relaxation. Be our guest. But sorry to say, whatever temporary pleasure you’ll get from it does not have much value over time, especially if you’re availing off it as added debt to your near maxed-out credit card. The same goes for charging a whimsical trip to Timbuktu because you were cowed by the seat sales and promos. If you have a whole other load of things you’re already charging to your card.
So you’ve earned enough to acquire a fancy car. Good for you. But there are downsides to owning one—and they’re pretty huge ones at that. Fancy car is equal to fancy other car-related things: maintenance, check-ups, upgrades, even gas. Also, it’s unlikely you’ll use it for car-sharing services or for rental, so no return of investment there. Sure, you can enjoy it all you want, but at the end of the day, once you get to study the numbers you’ll get to see why this is one debt you should’ve stated away from.
Your second childhood
Try not to be tempted every time you see a zero-interest promo. Sure, it’s a great way to spread out your cost, but you should first consider what you’re using it for. The new iPhone would really look good on your hands, but is it worth going without groceries for a month?
The same goes for your signature shoes, designer bags or those die-cast Marvel Superheroes comic books. Don’t fool yourself into splurging on these “investments,” because they’re not. Go with practicality instead of satisfying your childish need to look and have better stuff than your friends.
As a rule of thumb, before you make any kind of money move, ask yourself these: 1) Do I really need it? 2) Can I really pay for them? 3) Will it make me more money? Mull over these questions a hundred times before making any purchase. If your answers to those questions are YES then go ahead and spend; if not, you should consider other more affordable alternatives.
In conclusion, distinguishing between good and bad debt boils down to necessity. In particular, does the necessity justify the obligation you’re about to take on. The long-lasting effects of a relatively large debt, like that of a big value personal loan, can be quite severe—and using it for such a trivial purchase only doubles the crippling ramifications it’ll have on your finances.