Be Debt-Free: Why You Should Start Paying Your Debts Now
Published: June 23, 2021 | Updated: July 23, 2021 | Posted by: Moneymax | Personal Finance
The pandemic taught us a lot of lessons, including the importance of being financially prepared at all times. With about 7.3 million Filipinos retrenched since the start of the lockdown in 2020, you can no longer say “Bahala na si Batman” and leave everything to chance. The reality of poverty and mounting debts can haunt you while you fight the fear of contracting the coronavirus.
And if the pandemic has triggered you to borrow money to survive, it should also be the same reason to pay back what you borrowed. Nobody knows when we’ll be facing yet another crisis like COVID-19. So, as we all shift towards the new normal, let’s plan out a financial goal and enjoy the benefits of debt-free living.
Table of Contents
- What is the Difference Between Good Debt and Bad Debt?
- Should You Pay Your Debt, Save, or Invest?
- Why Should You Start Paying Your Debts?: 5 Benefits of Debt-Free Living
- How to Achieve Debt-Free Living
- Final Thoughts
What is the Difference Between Good Debt and Bad Debt?
Debt is debt no matter how you describe it. Debt means you borrowed money, which should be returned to the lender accordingly.
However, there is a huge difference between the two types of debt. Good debt refers to borrowed money to fund an investment or something that could benefit you in return. Bad debt, on the other hand, is money borrowed to pay for purchases that depreciate.
An example of good debt is getting a personal loan to pay for your child’s tuition. You borrow money to invest in your child’s education, which could benefit them in the long term.
Good debt can also be a way to boost your income. Some people apply for short-term loans to fund a small business that could earn them profits. A few also borrow to pay for online classes that could boost their skills, making them more competitive when applying for high-paying jobs.
Bad debts don’t usually offer the same benefits as good debts. Bad debts sometimes result from impulse buying or bad spending habits. High-interest loans, which you fail to compute because you didn’t have a plan for emergencies, can also be considered bad debts.
In these times of crisis, it sounds impossible to be debt-free. Although financial experts understand why you need to borrow money sometimes, they won’t encourage you to keep on borrowing, especially if your income can’t cover your debt repayments. You can always consider trying out a good debt, but you should also do the math before taking out a loan you can’t pay for.
Should You Pay Your Debt, Save, or Invest?
The road to debt-free living is not easy. Often, you hardly earn enough cash. And at times, you have the cash, yet you’re caught between saving it or settling your debt.
If you’re constantly confused about which of these two choices are more beneficial, then here are a few situations when saving first is better than paying off debt and vice versa:
Situation 1: Pay your debt first if the interest and fees are high
If you got a loan with a high interest rate, then it’s wiser to use your extra cash to pay it off, rather than deposit the money in your savings account that can earn only as much as 0.025%.
For instance, you have a short-term loan of PHP 5,000 with an interest rate of 10% or an interest of PHP 500 per month. You also have a savings account that lets you earn 0.025% per month or PHP 1.25. Use your money to pay off the loan so that you won’t have to pay the PHP 500 interest.
Situation 2: Save the money if you’re on a fixed interest loan agreement
A fixed interest loan agreement is a loan with constant interest charges for the entire loan duration. This means the fees don’t change even if you pay them in advance, unless you pre-terminate the loan and pay the balance in full. In this case, your option is to save the money and wait for the due date of your monthly installments.
Situation 3: Invest your money if the potential return is higher
Investing is a little different from saving because investing lets you grow your money faster than letting it sit in the bank. Small businesses, real estate, and bonds are a few of the many practical investments that could let you earn more.
If the potential return from investing your money is higher than the earnings on your savings account or the interest on your loan, then you’re better off using your money for investment. This is especially true if you don’t have an immediate need for that amount and have a long-term financial goal you want to achieve.
Why Should You Start Paying Your Debts?: 5 Benefits of Debt-Free Living
There are good reasons why you should aim for a debt-free living regardless of your age. Whether you have a good debt or a bad debt, one of your goals in the new normal should include getting rid of your debts.
Here are some benefits of having no debt.
1. Being Debt-Free Gives You Peace of Mind
Imagine yourself hiding from that old friend whom you owe a few thousands of pesos five years ago. You can’t mingle with your common friends or even be in the same group chat with her.
Worse, you can’t sleep at night thinking about who else knows about your debt and what they’re saying about you. Peace of mind is a privilege to those who are responsible enough to settle their debts.
2. You Can Plan for the Future
One of the advantages of being debt-free is having that chance to focus on future goals. Instead of worrying about your due date, you can start saving for your dream house where you and your family can settle. You can arrange your monthly budget accordingly to set aside money for renovation or mortgage down payment. Without debts to worry about, you can accommodate positive thoughts and realize your dreams.
3. You Can Start an Emergency Fund
The COVID-19 pandemic is an emergency nobody anticipated to be this long. If you are debt-free, you can save your money (instead of using it for debt repayments) to secure your family’s future. You can even pay for your loved ones’ health insurance plans.
4. You Can Start Owning Assets
Nothing is impossible for someone who has responsibly settled their financial accountabilities. If you’re debt-free, you can save your extra money to buy a property or a vehicle, which is essential during the pandemic. Break free from debts, so you can start exploring opportunities to own assets and become financially secure.
5. Being Debt-Free Improves Your Credit Score
A high credit score gives you financial security knowing that lenders have confidence in you as a borrower and your chances of getting approved for future loans is high. You’ll never have to worry about being declined for a car loan or a housing loan because you know you managed your debts wisely.
How to Achieve Debt-Free Living
If you search on Google about ways to become debt-free, you’ll get hundreds of answers that are practically applicable to anyone. However, you should understand that being debt-free starts from your acceptance of the situation and your will to get out of the misery quickly.
Once you’ve accepted your obligations, then it is time to follow these simple steps.
1. List Down All Your Debts
The list should include the due dates, interest rates, fees, and other terms that go with each one. Start by rearranging your budget and prioritizing one debt after the other. You can either pay off the ones with high interest or settle those with low interest rates depending on your budget.
2. Apply for Balance Transfer or Debt Consolidation
Normally, debt consolidation and balance transfers in credit cards offer lower interest rates than regular loans. Shop for credit cards that offer 0% interest on balance transfer transactions. You can also apply for personal loans to get all your debts into a single account.
3. Look for Ways to Earn Additional Income
The online world has opened a lot of opportunities for different skills set. Evaluate your skills and look for online gigs that could provide you with extra money to cover your dents. Sometimes, you don’t need to have a unique talent to be hired. A simple typing job or a virtual assistance task for a few hours a day can ease the burden. You can always look for ways to pay debts even when your income is low.
4. Live Within Your Means
This sounds like a cliché, but living within your means can work magic on your finances. Spend way lower than what you earn and make enough room for loan repayments. Avoid the urge to spend on things you don’t need. Always plan your purchases and make sure you don’t buy more than what you can afford.
Being debt-free is not a walk in the park. It is a choice. You can always read a lot of articles about the benefits of debt-free living and getting out of debt, but one of the most effective steps in this journey is discipline. Having zero debt gives you financial freedom and security, which could transform your life and the lives of the people you love.
-  Pandemic in PH: Misery beyond numbers (Inquirer.net, 2021)
- Photos from Freepik
With a goal to help Filipinos lead healthier financial lives, Moneymax regularly publishes tips and tricks on personal finance and lifestyle, among many other topics. For more finance-related news and articles, follow Moneymax on Linkedin.