Career & Finance

Your Brush with Debt

The word interest is a two-sided coin: it is defined as the incentive of spending money later (through lending or letting money work through the bank or an investment instrument), but is also defined as the cost of spending money now (through borrowing or credit).

While it is true that availing a loan or using a credit card is not a bad thing, it is the interest attached to it that some overlook.  And the more we uncontrollably borrow money or use our credit card and fail to pay on time, the more the interest escalates.  If managed poorly, this escalating amount of interest due can slowly become the reason why some of us fall steadily in an endless spiral of interest payment after interest payment, and eventually end up spending everything we earn to cover just the interest, and not even reducing the principal debt we owe in the first place.

While the temptation of spending money now and gaining our desires in the shortest term possible is very satisfying – be it the newest smartphone, tablet or even that 0% interest laptop we’ve always wanted, swiping that credit card relentlessly can have adverse effects in the long term.  Credit cards are often seen as an extended wallet, or a way to increase your purchasing power, but simply put, it’s a deal you enter where you can “buy now, pay later.”  When used responsibly, it will create convenience for you by not having to carry cash, or by consolidating your bills due and paying them off all at once; but when used uncontrollably and the “pay later” part of the deal comes in with you unable to pay, so begins your journey into debt valley.

If you’ve already experienced being in debt and managed to escape its trap, congratulations as this feat is never an easy one, yet is life-changing.

However, for those still stuck in this quagmire, don’t worry because it’s never too late to get out of debt.  Here are 5 steps and tips on how to get out of debt valley:

1. Admit that you’re in debt

As corny as this may sound, this first step is actually your key to changing your spending habits.  Admitting to yourself that you’re in debt allows you to make the life-changing decision that your life will start revolving around on: to choose to get out of debt.  This way, your impulse decisions, rationalized buying motivations and ultimately your behavior in spending will change because it’s your choice to do so!

2. Set aside a written amount from each salary to pay off amounts you owe. 

This is a permutation of Kiyosaki’s famous formula of: Income – Investments = Expenses.  For now, you probably can’t afford to set something aside for your investments, as the interest expense you’re bearing will probably be less than the yield or interest you’re getting from your investment vehicle, making it a losing proposition. Therefore: Income – Debt Payments = Expenses.  Similar to the first equation, this is a method of “paying yourself first.”

This involves a lot of sacrifice and dedication. Treat this exercise as paying a tuition fee for the lesson learned when you entered into debt.  And in due time, this tuition will end when you’re finished paying off your liabilities! Don’t set aside too much that you’re left with barely nothing to keep yourself afloat until the next paycheck, but don’t aside too little either such that you’re only paying the minimal amount due.  Ensure that you’re able to pay not just the interest (or part of it) due, but also some of the principal as well, or else you’re not improving your situation at all.

3. Create a plan and prioritize the debt you absolutely need to pay off first.

If you have more than one debt (various loans and/or credit card bill/s), prioritize paying off the ones that charge the highest interest rate first as they are the ones that create the deeper dents.  I’m sure you’re more familiar than anyone else on your income structure and when your salaries, allowances and bonuses (discussed below) are granted, so you can plan ahead by beginning with the mindset of reaching zero debt.

Plot out via a calendar, timeline or even your phone’s notepad or alarm a schedule when you should be pay. Follow this schedule strictly.  Don’t ever tell yourself that you can miss this month’s debt payment and “double-up” next month — you’re only setting yourself up for a scenario of short-term gains for long-term pains.   Give yourself a deadline so you motivate yourself.  Paying debt is a demoralizing exercise, but look on the brighter side of things: If you set a 10-month schedule to pay off your entire debt and you’re already on your fifth month, you’re halfway through your journey!

4. Bonuses or windfall income are a chance for you to get out faster

While bonuses, profit share and cash allowances are seen as ways to finally purchase that dream TV or gadget, you have to see it differently.  These are great chances for you to remove a big chunk from your debt schedule, or even eliminate one or more of your debts! Sure, you can reward yourself with a small treat to celebrate your hard-year’s work (keyword: small), but remember, your goal is still to reach zero debt!  Remember, just because you CAN buy it and everyone has it, doesn’t mean you SHOULD have it as well.  It’s empowering enough to know that you can afford it, but choose not to buy it.

5. Earn more or spend less

To accelerate this process, you have two “boosters:” earning more via a small business or a sideline, or finding a new job that pays more, or simply spending less.  The former is arguably not a complete solution, as studies have shown that your spending habits are a function of your earnings, and people tend to maintain or improve their lifestyle as their income increases, thus negating the increased income.  But for you, earning more must be seen as an opportunity to maintain your current lifestyle meanwhile accelerating your debt payment schedule.  Don’t worry about not being able to pay everything off at once, it’s what you plan is for anyway.  And looking again on the bright side: you can enjoy your increased income in its entirety when you’re out of debt!

The latter, on the other hand, is the more obvious booster.  Be practical and patient — remember, you’re on a strict schedule.  The less you spend, the more you’re able to set aside.  The more you exercise this, the more this becomes a habit, and the more this becomes a habit, the more it changes your behavior.  The more this behavior is instilled, the easier for the behavior to become a lifestyle, and thus easier for you to say no to buying something non-essential.

Getting out of debt is life-changing, and it’s never too late to start.  Just like exercise, though, it’s never a one-time thing: you must consistently stick to your plan and schedule, while maintaining your mindset to choose to get out of it and finish what you started.  And in due time and persistence, your desired results are not just written on your plans, but also zeroed-out on your billing statement.  It’s definitely liberating to know that you don’t have any debts due on your next paycheck.

Finally, once you’re out of it, you can then revert to Kiyosaki’s original equation to pay yourself first via investing and therefore start feeling the favorable definition of interest: the one that puts money in your pocket. Good luck!

About the Contributor

Representing the financial services for over 10 years and an aspiring teacher, Francis believes that paying it forward through education and financial literacy is the kindest and the most noble of lessons you can ever impart to the present and future generation.  He takes his coffee black.  Contact him at francis.f.valencia@gmail.com

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