Most of the time when you seek an answer to the question: “How to pay debt?” you’ll get a short straight forward view of: “be satisfied” – “money can’t buy happiness”. These may be true in some sense, but believe me, this is not enough to be called an advice.
Debt is much complex than we know. For many, being stuck in the unending loophole of bad debts are just results of a personal accounting mishap or an irresponsible spending. But in reality, debt can be a dualistic entity of wealth and poverty. It can be driven by desire, and it can also be because of needs. It can be caused by an impulsive act; debt can also be born on emergencies. Debt can help us build ourselves for a job, but it can also be a tool for a self-destruct. So, see – being satisfied is not always the best solution. And true, happiness is not bought– but we need the money to pay our bills and live in peace. Thus, we need more than just “live simply” and “re-focus your joy.” What you need, is a thorough journey in understanding the psychology of debts, an array of wise techniques to gradually get out of your life-sucking loans and a long-term financial management advice that will surely bring you back on track. Coincidentally, this WeInform article has it all.
Part 1: The Psychology of Debt and Effective Ways to Manage Debt
You might know already your cognitive conflict but you are too rigid and too determined to deny or ignore reality in it, which can cause you to take on actions that instead of helping you in alleviating your growing money suffering is burying you deeper. Here are some symptoms that you’re debt denial:
a. You don’t seem to care or you’re downplaying and undervaluing how much you owe.
b. Ashamed of being collected publicly. You hide, you don’t answer calls.
c. Telling yourself that it is normal to be soaked on debt. Rationalizing mistakes
d. Opening a new credit card after the previous one was worn out.
This behavior only offers short-term and false relief. Charges and interest are still piling up. That’s why, knowing and embracing the root cause of your financial setbacks due to excessive loans and credit demands is important. It can set you on the right path and methods to get it all out of your head and chest and show you a way out towards a debt-free environment. Shortly speaking, you just have to know where to tap.
So, why do people really fall and stay indebted?
1. Keeping up with appearances
Our financial insecurities are brought by our behavioral or psychological insecurities. We are so drenched of the idea of keeping up with a lifestyle that is over our head. There is nothing wrong in dreaming that someday we can live in comfort, we can wear branded luxury clothes and shoes, we own the latest iPhone unit or we drive brand-new car model or we got to the mall at least once a week. If we are working hard for it, then go for it. But, if you’re spending too much than you earn just to show-off, or to mask-up your insecurities, or to give you temporary gratification then you may be the richest looking guy but the most broke person in the neighborhood. Again, you don’t need to be satisfied, aim big, aim rich – but you have to be aggressively working hard towards it not settling on renting the life of the rich.
ADDITIONAL READING: 9 tips to manage your debts
Additional point: if you can’t buy it in cash, don’t buy it at all. Prices can double or triple when you fall for an installment scheme.
2. You’re anxious that you don’t earn enough
You’re just anxious that you don’t earn enough because you don’t do budgeting. Not having a budget is like blindly throwing cash out of a window and you are more likely to do impulse buying. Lack of self-control towards our finances can lead to our finances controlling itself. Hence, planning ahead of your expenses can save you enough to survive before the next payroll.
If in any chance, that salary or your income is really the problem, then you might want to consider taking on extra jobs to bring extra cash. You can work double by having a part-time job during the weekends or you can invest in a venture that could give you passive profits.
3. You don’t want sacrifices, you don’t pay. You lose hope
Debt is a lifestyle and psychological struggle. Carrying more than we can handle and not cutting excess baggage is the reason why our financial flight is flying low. You don’t want to cut expenses on fast food or Starbucks, you can’t imagine your life without cable or internet. You use too much electricity by an all-day usage of AC. Making no temporary sacrifices to recalibrate your spending and debt attitude can later on result to you not prioritizing your debts. When you keep on foolishly telling yourself “I will start paying and budgeting next month…” but still months came and went, nothing has changed, you’re not solving a problem—you’re simply delaying the inevitable.
Then, after succumbing to your untouched problems you will now start to lose hope. You feel stressed, depressed, and easily angered. You will begin to feel that you’re not moving towards the end goal and sooner or later, you will not be moving at all.
It can be overwhelming and terrifying, there’s no doubt to that. But a short-term uncomfortable lifestyle, only for a period that you again will be strong enough and smarter.
1. Cut off unnecessary expenses,
2. instead of buying too much, save some for-emergency funds,
3. prioritize paying debts more than the minimum and gradually move forward.
Once more, debt is not just an accounting mishap – it is caused by how we want to see ourselves, what we want to feel or what we are telling ourselves to see and sense. So, the right solution for that is also psychological: self-esteem, self-control, discipline, education, money-smart planning, needs assessment, and positive financial perspective. For, avoiding being in debt is better than finding a cure when all things got legal and serious.
Part 2: Distinguishing Good Debt and Bad Debt
From what you mostly read above or from other sources, you may resort into an attitude of avoiding debts as much as possible. Well, that’s not wrong at all. Being debt-free is living worry free. You pay bills on time, you sleep well at night, you can go to places without being scared that you might be spotted unprepared by your collectors. However, there are really some instances or goals that the required first step is to loan.
Debt is not all bad. We may look at some of people’s debt as a “leap of faith”. Some debts can actually save a fortune or start a fortune. And, these are good debts. Good debts are money borrowed to ignite a free-flowing and stable income. Instead of wasting good years of saving for a capital, some brave and bold business owners resort to debt to initiate their grand venture. And when the business hit the market sales, they responsibly and aggressively pay-off their balances to further enjoy the fruits of their labors. Simply, good debts are debts used to generate income and build your net worth. Moreover, good debts are loaning that positively impacts you and your family’s lives, and these are the following:
We are now fortunate that the government has decided to shoulder most of Higher education fees in a National university. But still, even in a free-tuition state, miscellaneous expenses, project expenses and other may still be encounter during your child’s academic year. Debts for education has an earning potential. Educated, degree-holders have higher chances to be employed in a good-paying job. However, not all program nor situation are equal. So, you might want to consider short- and long-term projections before deciding for a loan.
For students: If your parents borrow money to give you good education, make sure to give it back by doing well in school or in college.
Borrowing money for capital will surely fall as good debt. Building your own business may be risky at first, and having debt is still a gamble here. But you deciding to take this path means that you are courageous and wise enough in terms of your financial behavior. Thus, we suggest that when you loan for your business venture make sure that you put it in an entrepreneurial idea that you are greatly knowledgeable of and interested to.
3. Your home, and other Real Estate
Living on your own home regardless if you’re paying monthly or annual installment is so much better than renting an apartment for years without owning it. Housing loans are good debts. There’s nothing that could level the comfort of doing what you love at your own house. Aside from that, other real estate investments can also be used to generate profit. For example, if you loan to build apartments for beginning families or individuals—it is rest assured that your loan can be settled for the first few years and the permanent financial benefits of your apartments remain. For some, investing and profiting on land titles or buildings are also possible through debts.
You see, not all debts are bad. But there is surely a mass of things that can make a simple debt your worst nightmare. Bad debts on the other hand robs you in the present and steals your future. It causes stress, anxiety, and discomfort. It is the absolute opposite of all good debts can do for you. Simply, these are debts to consume. Bad debts are borrowed money to buy something that will only cost you more and will not return anything to you. These are irresponsible, impulsive and show-off expenses over your own earnings and budget.
Expenses on cars does not stop in just buying it. It will cost you much on maintenance, insurance and other driving documents. Moreover, like phones—cars are depreciating assets, meaning; when you’re done paying for your car loan, your car cost less than it was when you got it. But if you really want or need a car (maybe for your job or business) then, you should apply for a loan that offers low to no interest. Or just invest on high functioning second-hand vehicles.
5. Clothes, Shoes or Posh lifestyle
Sure, live your life. But you have to be confident that you’re not going to sell your clothes and shoes in the future as you stand on the edge of bankruptcy. – there’s no explaining needed in here. Just spend according to your budget. Using your credit card to buy these consumables are unwise usage of card benefits and rewards and a ticking time bomb of interest and charges. Again, if you don’t have the cash for it, don’t buy it.
6. A Debt for a Debt
This is the debt loophole. You pay-off other debts through a loan that you will again, pay for with another loan, and the cycle never ends. When this happen, a better debt intervention should be done to save the consumer get out of the suffering. No one can really determine how or why this happen. Reasons are varying, no judgment. Yet, as much as possible we have to avoid a loan to pay off another loan. It is a never-ending torture.
Determining our spending and borrowing attitude and behavior will also allow us to characterize these as whether a good debt or a bad debt. If our lifestyle manifestations fall mostly on bad debts then we must re-think our ways and find a cure to put an end to a budding disaster. But, when our debt activities are creating potentials for income and stability then we have to find ways to better cope with incessant changes in the economic climate with more effective financial management strategies.
Part 3: Wise Ways to Get out of Debt
There is no other way to get out of debt but by paying the debt. But, excellently doing this can save you a lot of trouble especially if you’re income is considerably low.
You have to acknowledge the fact that you owe money, and you have to prioritize paying it back. Enough with the denying and the delaying. Start your baby steps of debt management with these few insights.
1. Make a list of your Financial Situation
Your first move should be organization of your financial situation to see whole picture of your debt condition. Make a list of all your credit, their due dates, interest rates, required monthly payment. So, you can see where or how much to start. You may begin paying more that minimum to the one with higher interest rate over time – then gradually pay minimum for later and lower debts. You may use these payment methods:
Method 1: Avalanche (Bruce McClary- National Foundation of Credit Counseling)
This method requires you to pay the debt with the higher interest cost. Simply put when you pay ones with the highest rate, you’re paying down eventually – increasing the amount of your savings.
Method 2: Snowball (Dave Ramsey – Business magnate)
Here, instead of paying first your debt with the highest amount, you pay the least. Psychologically, it is taking things up slowly, like a snowball. The idea is to gain motivation, and habit of paying.
After planning your payment method based on your list, you may want to put alongside, one additional sheet for your monthly expenses, electric bill, water bill, food and fare and your monthly salary. This will help you see the entirety of what you earn, how much you spend and how much you owe. If the numbers go negative, you may want to trim a little on your expenses and savings.
2. The Zero-Sum budgeting technique
Expenses is equal to your income minus your debt and savings. This is zero-sum budgeting and it can help you two way:
a. makes actionable decision towards your income
b. reduces excess and unnecessary spending
the idea of this is that you allocate your income to bills, debt and few savings even when you got zero at the end of the month. The first cut of your income is for debts and savings, the remaining cash can be used for your most important expenses. You may cut or sacrifice things like extra entertainment, vices or leisure spending but this are just temporary financial discomfort if you want to be debt-free in the long run. Delaying this budgeting scheme because you don’t want to give up on your fake wealth fantasies means increasing the amount of your need-to-pays. So, if you want to regain control over your money, then start allocating more on debts and savings until its zero.
3. Look for ways to Save Extra
Where are you spending too much money? – and is there any alternative to reduce cash thrown at these and save some extra for emergency funds?
Remember debt occurs when our expenses top our salary. So, avoiding this to happen again during your debt erasing period may include looking into more ways to save more on your daily needs and wants. For example:
a. instead of eating outside or buying work lunch on fast foods or carinderia, you may want to consider brown-bagging or bringing pack lunches at work. Moreover, you should consider cooking more at home and eating out less.
Read: Brown bagging Lunch at Work saves Money
b. Buy things on bulk especially those that are on sale
c. Save grocery coupons or consider using scan payments to earn cashbacks and earn points
Read: 10 ways on How to Save Money on Groceries
d. Cut subscriptions that are not work essential. (cable, gym, video and music streaming)
e. Check thrift stores (ukay-ukay)
f. Invest on good second-hand vehicles, or buy a motorcycle or a bicycle to save transportation money.
4. Work Extra
Finding an additional source of money can help you pay your debts aggressively. This may not be always feasible or applicable in all situation, but living your normal life and expenses while you manage to pay your debts may require you to level up your income. Here are some ways you can do:
a. Get a part-time job, you can work extra at night, or during the weekends.
b. Work more overtime
c. Declutter your house, apply minimalism and sell your things.
d. Work on getting promotion
e. Rent part of your house
There are a lot of paths to take to get off your debt problems. Just don’t resort in hiding, scamming or ignoring your responsibilities. For if you must know, you may not be jailed for owing some money but a bit of fraudulent act such as changing address, bouncing checks or swindling can surely put you behind bars.
Read: May Nakukulong ba sa Utang? Charges and Constitutional Limitations of Not Paying Debts
Prevention is better than cure as they say. If debt is an illness, we don’t want to get one. And there is no better way to avoid it than having good financial behavior.
Part 4: Smart Financial Management
Imagine a life where you can buy anything you want, eat your favorites, live spontaneously without hesitations and not worrying too much of your retirement. – that’s the ideal life, and it is achievable.
However, there is no fast way to get this life, you have to work your way up there. Deal with a lot of struggles and encounter breakdowns. But when you focus your mind to it, that relaxing sit on the beach with your margarita is worth it.
1. Know what you Value Most
Know your priorities before plotting you budget. What drives you to wake up every day to work? – always make sure that your financial drives are for your long-term benefits. We tend to procrastinate on important things such as educational development or retirement because our priorities or life values are not properly set. Know where to put your money.
2. Save for Emergencies
Many people resort to debt because of health emergencies. Hospital care is not a joke when it comes to expenses. So, not investing on healthcare, life insurance or emergency funds can really put your financial condition in a terrible situation.
3. Invest more on stocks or Mutual Funds
The idea of money working for you is a trend today. Investing on things that give you annual compounding interest can really work as saving for your future. Instead of putting all your money in a bank that hardly grows, why not put some to mutual funds or the stock market to be earn 10% more than bank savings.
You may also want to read this: HOW TO CREATE PAYMAYA ACCOUNT
These are the golden trio of Financial management, by controlling your expenses and balancing your wants and needs, you get to enjoy a spontaneous hassle-free life. By saving for emergencies, you can now live without worry or explore the world without fear and by making your money work itself to wealth you can now earn, save and still earn. A positive outlook towards ourselves also increases our control over money and for some, a brave and bold risk taken could be a treasure chest. Yet, in a nutshell, what makes us good financers are self-control. True, that it is never easy, especially with the varying conditions of employment, family needs and your personal needs. But with a pinch of discipline and mindfulness of your financial situation you can now aim and achieve a much comfortable life. We hope that we helped you with the effective ways to manage debt and finances.