Money 4 Life: Good debt, bad debt

I come from a family that frowns on any form of debt. Growing up, my parents would tell me that it’s okay if we had less properties than our friends because at least we don’t owe anything that can be taken away from us.

The only loan they had then was for the house that we were living in which they completed paying off in fifteen years.

I saw debt from my parents’ perspective. My father, who is a lawyer, represented many companies in cases involving huge debts. Some of my dad’s clients were people we personally knew, with children I grew up with. And I saw some of these families lose their properties and their businesses to bad debts, so the thought of getting into one terrified me until adulthood.

bad-debts

Pregnant, homeless, and in debt

In 2010, when I was 8 months pregnant with my third child and we couldn’t pay a Php 34,000 debt consisting of rent and bills, and personal loans that piled up,  I was beside myself with stress.  It was only Php 34,000 – very small when you think about it, but there I was, losing sleep, trying to figure out a way out of it.

To top it off, we were asked to move out of place we’ve called home for 7 years and we’ve exhausted all possible financial sources (translation: friends we could borrow from) we had at that time.

I remember calling my dad, sobbing and hugely embarrassed, admitting to him for the first time that we needed help.

It wasn’t just the Php 34, 000. For years, we struggled to make ends meet. The eviction became a turning point in our life. I don’t recall ever been as responsible with our money as much as I had been the year after that.

(Read: Choosing Insurance Policies at 40)

Not all debts are bad debts

The word “debt” is generally construed negatively in our society. Many Filipinos are still ill-educated in the area of finances and it’s unfortunate many of us still can’t identify between a good debt and a bad one.

So what am I saying here? I’m saying that not all debts are bad. At least, that’s what Aya Laraya said at the last session of Money 4 Life workshop that I attended.

According to Aya, there are good debts and bad debts, and it takes the right knowledge,  mindset and skills to leverage a good debt.

3 Debts to avoid

What are bad debts? Basically, these are money you loan to purchase things that usually have no long term benefit to you. Some examples of bad debts are:

1. Consumer goods

Examples of this type of debt are credit card debts procured through the buy now-pay two months later scheme, home credits, and the likes.

Some people apply for SSS loans to purchase electronic devices they do not really need.

Aya Laraya reiterates that using credit cards has its benefits such as being able to keep track of your expenses better. He shares that he had arranged a credit limit on his credit card based on the amount he can afford to spend for the month and does not go beyond that budget.

2. Emergency loans

Emergencies are inevitable which is why ideally, an emergency fund is established beforehand, instead of resorting to unplanned loans later on.

The problem with this is that a vast number of Filipinos have overlooked its importance which is why many find themselves buried neck-deep in debts due to medical and other personal emergencies.

3. Bad business debts

Examples of bad business debts are applying for a car loan with plans of renting it out via third-party companies to cover the monthly payment; or a housing loan to purchase a condominium unit with the intention of renting it out to cover the monthly amortization.

This is bad business because cars and houses depreciate in value and they come with expenses such as taxes and repairs. You’ll be spending more of the profit you were hoping to get in the long run.

What is a good debt?

A good debt is basically money you loan to invest on something that generates income or something of a long term value. So with that definition, Aya Laraya ticks off profitable business ventures and a house you intend to live in for a long time as examples of good debt.

(READ: Should we buy a house now?)

Another is listing your business in the stocks market, wherein you sell bonds to investors and you use their money to grow your business. Aya Laraya cites the Ayalas, Gokongwei and Henry Sy as good examples of successful use of investors’ money.

captain-hat

Speaking of the Ayalas and the Sys, we were informed that one of the newer products of Sun Life, the Captains Fund, is now a regular product. The Captains Fund lets you put your money on the companies of the most bankable and formidable industry names such as the two business tycoons above.

The Captains Fund is an option available to VUL (Variable Life Insurance) investors. It’s a product we’re currently discussing with our FA since we learned that Sun Life took it out of their for a limited time only line.

(READ: How we chose our financial advisor)

Going back to debts, a loan, no matter the purpose, needs careful study of facts and careful planning.

You need to ask yourself: Why are you borrowing money? Is it necessary? Have you looked into other options?

And most importantly, how will you pay?

It’s only wise to know what you’re getting into and what is required of you before you jump into anything, after all, most bad debts happen because we didn’t understand what we were doing in the first place.

This is one of those things where what they say about the more you know, the more prepared you can be applies.

The road to financial freedom often means taking out the blockades that stop you from reaching your goals. In this case – debts.

From our experience, the first step to get out of bad debt is to humble yourself, take responsibility for your mistakes and admit you need help. Then accept help and instructions from those who know better.

The roads will clear from there.

“Prepare your work outside; get everything ready for yourself in the field, and after that build your house” Proverbs 24:7.

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43 Comments

  1. You are really a good writer. You want to know why? From the first line you caught my attention until the end, I didn’t feel that I was reading a drudging finanancial article. Everything here are lessons that can be a beneficial to your readers. Very well written, I really like how you elucidate the good and the bad debts. Thank you so much for this article. I’m learning!

    1. The goal is to help fellow Filipinos understand how to manage their finances better, so if you did learn from this blog, that’s great.

  2. I am much like your parents I hated getting loans. The only one I have right now is the house we are living in. I also limited my credit cards to just 2 – a primary card and a back up card. I rarely use them, or if I do I try to pay my bills in advance, just so I dont get to use the payment money for somethingelse.

  3. Now a days, credit card are used so frequently. Sometimes I forget to pay on time and unnecessarily end up paying more. Debts are debts! Better to avoid.

  4. Many people are still unaware of how to manage their finances correctly and end up overspending or getting into a huge debt that would be difficult to pay off. This is a very informative post, thank your for sharing your story.

  5. It’s really helpful to leverage sometimes though you should really plan for it and consider a lot of factors. Sometimes, we need loans on major purchases / investment and it could grow in the future.

  6. Bad debt is bad debt which is totally something for all to avoid but when it becomes so hard for one to keep up. you have no option. great read and insight.

  7. Thank you so much for this! I often enjoy reading articles about handling finances because they`re so applicable and helpful. I really like your message at the end about being humble. Many people get into so much debt because they “think” they can pay it off later. We can never be accurately sure of the future which is why we can`t boast about tomorrow (Proverbs 27:1). Being humble will enable us to accept and correct our mistakes, and avoid doing them again. Getting the right information and instruction will really help us move toward a better financial life.

    ❁ Grace ❁

  8. I still have debts paying this yr. My mom, my dad ang my Creditcard but I am a good payor wven to my parents.
    Slowly I will be debt free again and I can shop again, lol
    Kidding!

  9. Sunlife offers variety of products that fits every family needs. Thankful din ako to have our investment with them. Thanks mommy May for sharing your experiences this helps us to be financially aware, taking one step at a time.

  10. I’m allergic to loans, I really dislike calls from credit card companies stating that you are qualified to file a loan. Duh! palulubugin lang ako sa utang at interest. Housing loan ang meron kami which I think is a good debt.

  11. Bad debt and good debt. I was once trapped into a bad debt with credit cards but thank God i was able to pay it and now what i just have was a good debt? We are paying for our home loan in 5 years term and thank heavens we only had 11 months to go and we’re all done!

  12. I remember we’ve lost our home in Cavite because of my Uncle’s bad debt. I think they had millions to pay that our house was sacrificed to help them pay the debt. 🙁 That’s why from then on, I’ve become very much conscious of how I spend money especially now that I have my own family. We’d be raising kids who will soon be going to school. Takot rin akong mabaon sa utang dahil don. You’re post is so enlightening. Thank you for sharing these!

  13. Like you, for years, we were also making ends meet. When I was still young, we were financially struggling. I don’t want that to happen to my family but life is difficult, we and so is saving. Right now, with my husband working abroad, life is easier but we also know this is just temporary and so we’re trying our best to save. We both don’t want debts. Pero now that I know there’s also a thing called “good debts”, we might consider that in the future.

  14. I didn’t there’s so called good debts. As much as possible I don’t want to have any debts. Save as much as I can for the future. Right now, we’re saving for our son’s education. He’s still 2 but it’s never too early to save.

  15. This is very timely. We are slowly settling all of our debts. I will follow one of your points that is to set a monthly limit in spending. Credit cards should not be seen as our enemy but perhaps a tool that should be used with great control.

  16. Your series on Money4Life is really an eye-opener. I really need to re-think my spending and pursue other sources on income, as to not result in debt. The tip on credit card spending might come in handy for me!

  17. I learned this when I was taking my MBA. Unfortunately, the knowledge came too late as we were already neck deep in debt by then. Still paying for the repercussions of that. Tsk tsk!

  18. It’s been 5 years already since the last time I uses my credit cards and now I am happy to pay in cash in every purchases I have made. I hope that more Filipinos will learn how to manage their finances and be financially free.

  19. I cringe with debts. My family made bad financial decisions when i was in college. Although that has been settled already, i promised my own family won’t go through that. There are a few things that i live by when it comes to money and it’s that i would never buy things i can’t purchase with cash, and that to never get a loan to settle a previous debt. I live without a credit card. And i so much believe that it’s ok to live simply and not have so much just as long as we’re debt-free.

  20. I enjoy reading your money 4 life series, it’s really an eye opener. I think Filipinos, in majority, still have a hard time distinguishing good from bad debts and this stems from poor financial education.

  21. Good read. And I agree on credit cards helping me keep track of expenses. As much as possible, I like paying by credit card (straight payment since I don’t want to get confused on monthly instalment payments) so I can see what the big ticket expenses were for a particular month!

  22. That’s why we really have to be mindful with our debts. We must meticulously manage them if we want to get rid of them as early as possible. And this article is such a help. Knowing bad and good debts helps us know what to prioritize.

  23. My mom would always remind me to save for the future. Do not ask money or loan money for education. Save for it. Good thing that while i was working, i was able to save for the kids education. Oftentimes,my husband couldnt give tuition fee for the boys so I am using the savings. And Slowly, the amount is becoming too little already i pray my husbamd would really find a nice project to provide for the next tuition fee payment.

  24. Having credit cards is such a trap that many have fallen into. It’s actually not bad but just make sure that you have enough funds before you go on a swiping spree. I didn’t know that buying a condo with the intention of renting it out is considered a bad debt.

  25. Oh Sis! I can definitely relate with the 34k, been there and often times still experience it. Lol! Bad debts are easy to get and is all over the place. It’s true that we have to save for things we want rather than getting a loan for it. Saves us the headache.

  26. Sobrang iwas din talaga ako sa utang. Aside from hindi ako makatulog, ang hirap pang magbayad kung tama lang ang salary mu. As much as possible we live within our needs. Walang masyadong luho. Kung may gusto man, pag iipunan. Ang isang malaking utang ko lang talaga eh yung mortgage ng bahay namin which is I think nagiging bad debt na kasi hindi namin matirhan at pinarentahan namin sa iba because we are not ready to move in yet. 🙁

  27. I have my fair share of “shortage” of money story. I was also pregnant and I have nowhere to turn to. These days I do not buy what I can’t afford and I do not loan, I pay everything in cash.

  28. It’s kind of you to share your debt experiences. And your blog always reminds me of the importance of having investment funds. It makes me more optimistic about the future.

  29. Being a single mom, I can’t get away from debts lalo na pag mga emergency. Pero I always set this time frame to pay all debts and clear everything para at least before the year ends happy happy kahit ang bulsa. 🙂

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