Debt – how much do you know about it?
For many, debt is evil. It restricts you, prevents you from growing your money, and leaves you under financial obligation for many years. Some even call it as “multo” because it haunts you even during your sleep. For others, debt can be good – as long as you used it for the right purpose.
So, what exactly is debt? What situations led you to being in debt?
Debt, defined.
According to online website Investopedia, debt is the amount of money you borrowed from another person or entity. Individuals, small business, and even large corporations borrow money from banks or other lending entities to finance bigger purchases they can’t normally afford given the existing cashflow.
There are many kinds of debt:
- Credit card debt
- Consumer debt or money your borrowed to purchase or pay off items that depreciate or with no substantial resale value. Examples are buying a new phone or payment of medical expenses.
- Mortgage debt, which is secured by any type of asset such as house, car, or deposits.
- Investment debt or a type of financial obligation that you take in order to generate cash flow, free up funds, and build wealth. For instance, you borrow money to purchase stocks or renovate a property that you will put up for rent.
- Business debt, which is money you borrowed to start a business.
Regardless of the kind of debt, one thing is for sure: you will pay for a specific amount plus interest on a given date. In case you are unable to pay, the lender can foreclose the mortgages asset or worse, file a collection case against you and garnish whatever asset is under your name – which you don’t want to happen.
On a simpler level, why are you in debt? What attitude led you to being in debt?
Sources of Debt
Source No. 1: You spend tomorrow’s income today.
“May sweldo naman sa katapusan,” you might say. In fact, you feel confident that you can get by every month because you know that you will get your salary. In case you fell short before the end of the month, you decided to borrow money since you can pay it by the 30th anyway.
That is a wrong mindset. Spending money you don’t have yet – even if you will get them at the end of the month – is the reason why you and many other people are in debt. Advancing tomorrow’s income is a big no-no.
Source No. 2: You and your family keep up too much with the trend.
Many OFW families are guilty of this. Earning in dollars allows you to earn more, which means you can now afford the things you say no to before. Since you are away from your family, the way you could think of to make your presence felt is to send them things they asked you to buy.
What if you can no longer afford it? You take a second (or even third) job. Or you apply for a loan and promise to pay for it by the end of the month. See, it’s a never-ending cycle.
Source No. 3: Sudden change in lifestyle.
This is in relation to source no. 2. The sudden change in lifestyle allows you and your family to live the life. Apparently, the problem lies when your contract ended and there is no immediate job waiting for you. The bigger problem is you and your family refuse to change your lifestyle and live simply. To afford the things you were used to, you resorted to borrowing – one of the bad reasons for getting a loan.
Source No. 4: You don’t have a defined long-term goals.
Long-term goals are crucial in attaining financial freedom. It keeps you focused and grounded because you are saving up for something. You become more hardworking as well because you know that after all the sacrifices, you will be able to afford a new house or car. Without these long-term goals, you will continuously live in the present and not worry about the future. This creates a vicious cycle of borrowing and before you know it, you are buried in debt.