FEATURE ARTICLE

Getting Out of Debt
By Lolita Villa

Someone once said that, "Spending money you haven't earned yet is like using up years you haven't lived yet."

Ever had a problem with debt? If you live in a consumerist society like ours, chances are you've had a few in your lifetime. There are many reasons why people get into debt. They live below their means, buy things without having the cash to back it up, or get into money-based arrangements that they can't handle, like co-signing for a person with a tendency for bad credit.

The attack of the Credit Cards
One of the most common and debt-inducing sources is the credit card. Misuse of credit cards give people the false assurance that they can buy anything they want without the cash to supply their purchases. Wrong use of credit can be addictive, especially after having the short-term pleasure of gaining material goods that the card user previously couldn't afford. Now, on top of paying for the outstanding balance, the card user now has to pay interest charges too, especially when he or she can't pay the total balance of the purchases on or before the due date it should be paid.

Rina, 31, marketing head of a chain of health clinics, was a frequent card user. Her outstanding balance typically ran up to as much as P50, 000 at a given time. Often she ended up just paying off the interest, without making so much as a dent in her debt. Though she was making a high, 5-figure salary, she had 0 savings in her account and was always short on positive cash flow. She admits, however, that she continues to sustain a high-cost lifestyle.

On the other hand, Jenny, 26, a government employee, owned a credit card, which she rarely used. She ended up falling into debt when her boyfriend asked to borrow from her credit card. The relationship soon ended, and Jenny found herself being hounded by the credit card company and having a hard time getting her ex-boyfriend to pay her back.

Having debt means your money's not yours
This only shows that there are a million ways to incur debt whether directly or indirectly. However you see it, the point is, debt is a form of bondage and one of the topmost reasons that prevent people from achieving financial growth and stability. Debt is a major hindrance to making wise investments, and it puts you in a position where having debt means every centavo you make does not belong to you, but to the person you owe money to.

Deborah, 27, was in debt for three years before she was able to pay off her creditors. During that time, she was on and off jobs, and accumulated around P20, 000 in debt, which she retained, from borrowing money from family and friends, and investing what little money she already had in a failed business. Even though she occasionally chanced on good paying projects, she did not use the money to pay off her debt, and eventually failed to save any money at all. Finally, she landed a high-paying job that gave her enough cash to pay people off. Before investing in anything for herself, she prioritized getting rid of her debt first. Thereafter, saving money was fast and easy for her.

Though borrowing money can sometimes offer instant gratification or instant relief for emergencies, it is also accompanied by headache, loss of one's peace of mind, ruined relationships and years of living in a hand-to-mouth existence, with every centavo you earn going to credit card interests or the pockets of people whom you owe money.

Five steps to debt reduction and financial freedom
Staying in debt is definitely not an option, if you are climbing the path towards financial freedom. There are several steps to take to rid you of this scourge. Check out the tips below:

1. Have a healthy attitude about money. Before you can get free of debt and build on savings, you need to strike at the root of your problem - the way you perceive money. Analyze your attitude: do you feel the need to immediately spend each paycheque you receive? What are the things you usually spend on? Do you have short or long term goals about your financial situation? Answer these questions honestly; they may reveal things about you that you never knew about yourself.

2. Follow priorities. The first and most basic step in achieving financial freedom is to get rid of debt. This means that you need to realize that until you are debt free, the money that you have right now does not belong to you.

As much as possible don't go around buying that new pair of jeans that you've always wanted or a new cell phone unit when you owe several people various sums of money. Pour your focus and what money you have in paying off your creditors. Prolonging the debt is just one way of prolonging the agony, and most of all, the interests being incurred.

3. Plan your expenses. Normally, after getting rid of debt, it's important to set up a 1-2 months (short-term) savings for your usual expenses, and then a 3-5 months (mid-term) savings for emergencies, in the bank. After that you can start saving up for long terms expenses such as buying a new car, a house, education or insurance. After setting those things in place, then you can consider making (intelligent) investments in high-risk areas such as stocks, or a start-up business. Following this order of priorities ensures that you don't need to fall into debt all over again.

4. Live below your means. "A fool and his money are soon parted." Don't splurge when you get your first paycheque, and have a short-term expense plan in mind before some cash falls into your palms. Segregate your cash into envelopes that are intended for specific purposes, and don't cheat.

Try to come up with a list of cost-cutting measures and options, and employ them. Can you cut down on taxi fare? Bringing lunch from home instead of eating out will help you save a few hundred, or even thousands of pesos in the long run. Do you really need to go to Boracay in the middle of June? Forego those happy trips with your friends. Sacrificing the moment can mean the difference of having a few thousand pesos off your debt.

Designate the frequency or schedule of times when you will allow yourself to shop for new clothes and other non-urgent items. Make a list of must-haves, or things you believe you really need to save for (dentist appointment, a new set of contact lenses, a palm pilot to help you with your work, etc.). Having a list will encourage you to avoid wasting your money on trivial and frivolous things, which are a worse scourge than putting your money on serious investments that really matter.

5. Use credit wisely. If there is absolutely no way you can avoid incurring debt, use your credit card wisely and pay your debts promptly to avoid incurring charges, or getting into bad with your family or friends. When using plastic, make purchases only if and when you know you have the means to pay for this in cash before the due date arrives.

Consider transferring higher interest debt to a lower interest card by taking advantage of promotional offers many banks use to entice you to their line of credit. Do the math and see whether you can save a few pesos by making smart moves to reduce your debt.

The sooner you start making a serious effort at getting rid of debt, the sooner you'll find that your money stays in your pocket a lot longer.