“The rich rules over the poor, and the borrower is the slave of the lender” (Proverbs 22:7, ESV).
“Owe nothing to anyone—except for your obligation to love one another. If you love your neighbor, you will fulfil the requirements of God’s law”
(Romans 13:8, NLT)
In my previous article, we talked about the first phase in the personal financial planning process: cashflow management. Now, we will be discussing the second phase, the “D” in the CD-RW process, which is debt management or what we call the “GOOD” plan, which stands for “Getting-Out-Of-Debt.” Nevertheless, remember what I have said before, it is not always necessary to totally eliminate all debts because there are certain debts that are truly indispensable or even good such as debts incurred for business capitalization purposes. What is more important is that debts are reduced to manageable levels.
Unfortunately however, most people, even lawyers, get into the bad kinds of debts, particularly, consumer debts. Consumer debt comes in many forms, the most popular one being credit card debt. Believe me, I’ve been guilty of that as well! For those who are employed, your firm may also offer cooperative loans if you are a member of one. Moreover, as you get older and more successful in your law practice, you will also probably get a car loan or a housing loan, especially when you get married. And yes, having a nice car can definitely help you get more and better clients as it gives them the perception that you are successful and worth your salt.
According to the Bangko Sentral ng Pilipinas (BSP), there are over six million credit cards issued in the Philippines. The BSP reported that the Philippine banking system had P130 billion in credit card receivables as of September 2009, 13% of which were non-performing. Take note, that was 6 years ago. What more today? The problem arises when credit cards and other kinds of consumer loan facilities are abused. Ideally, credit cards should only be used for emergency purposes but if it really can’t be helped, you must at least make sure to pay the whole amount when the bill arrives and not just the minimum required amount. Paying only the minimum just buries you deeper and deeper into debt.
To make things worse, banks make it easier and easier for just about anyone to get a credit card these days. One day, you will just be surprised to find a pre-approved credit card under your name right at your doorstep (or mailbox), if you haven’t already! Verily, unexpectedly receiving those precious little plastic cards will make you feel like you have just won the lottery. But beware, what appears to be a blessing might actually turn out to be a curse!
New York Times best-selling author, wealth coach, and radio host, Dave Ramsey, said, “Personal finance is 80% is behavior and 20% head knowledge.” Daniel Kahneman, in his best-selling psychology book, Thinking, Fast and Slow, proved through experimental exercises that the emotional mind is more powerful than the rational mind. In other words, skill, although indispensable, is only the tip of the iceberg. No matter how skillful a person is, if his behavior or habits are terrible, then all those technical knowledge and skills go out the window. As celebrity wealth coach Chinkee Tan puts it, “It’s all in the attitude, dude!” Although, such a thing is also true for all other endeavors, it is more so for personal finance.
Getting in debt is a lot easier than getting out of it. It is easier to borrow money than pay it back. Debt is like a quicksand that is constantly trying to pull you down. The more you struggle, the harder it is to get out. Likewise, if we refuse to give up some of the comforts in life and change our spending habits, we will sink deeper and deeper into debt. For things to change, we have to change. In his book, Debtermined, personal development and success coach, Jayson Lo, discussed a three-pronged solution brothers Chip and Dan Hearth came up with.
- Direct the Rider
- Motivate the Elephant
- Shape the Path
The Rider represents the rational mind, the elephant, the emotional mind, and the Path is the direction a person wants or needs to go. The Rider holds the reins and seems to be the one in control, but the Rider’s control is unstable because he is so much smaller than the Elephant. The Rider and the Elephant need to come together and shape the Path by creating a detailed image of what the destination would look like once changes are made. Their book, Switch: How to Change Things When Change is Hard, calls it a “destination postcard.”
The tension arises, says Lo, when the Rider and the Elephant pull in different directions. Riders without Elephants produce understanding without motivation. Elephants without Riders produce passion without direction. Riders and Elephants without a clear path produce movement without progress.
According to my friend and internationally-renowned registered financial planner Randell Tiongson, author of No Nonsense Personal Finance, before we buy anything on credit, there are some things we must consider: First is purpose. What is the compelling reason why we need to borrow money? Don’t you have any other source of funds than credit? Is what you are planning to buy with the borrowed money a need or a want? If it is merely a want, wouldn’t it be better to just postpone the purchase until you have saved sufficient money for it? Avoid impulsive buying. There were a lot of times that I really felt that the thing that I wanted to buy was a need but after a good night’s sleep, I realized the following day that I can actually do fine without it.
Second is cost. Despite the disallowance of the Department of Trade and Industry (DTI) on charging additional fees for credit card purchases, merchants have since come up with cunning ways to circumvent the law. And yes, this includes “zero interest” purchases on installment. Instead of calling it “interest,” merchants would instead say that they will give you a discount if you purchase it using cash. That’s why it may still be wisest to purchase things on cash basis. If you want to learn more how this works and more, attend our Financial Planners’ Training leading to the globally-recognized Associate Financial Planner (AFP) professional certification.
Third is interest. We all know about legal fruits. No, not just the mangoes, bananas, strawberries and the like—although those are included. I am pertaining to civil fruits, industrial fruits, and yes, natural fruits. One of the most ubiquitous civil fruits aside from rent is interest. Interest is what debtors pay their creditors as compensation for the use of their money. The thing is, consumer loans, as opposed to business or corporate loans, often carry with it higher interest because of the risk factor. Most banks charge 3% to 3.5% per month as interests on credit card purchases. That would result in annual nominal interest rates of around 36% to 42%! Take note, we are only talking about banks. Non-institutional lenders such as loan sharks, 5-6, or other private lending companies can charge up to 20% per month! What’s worse is that interest on debts is usually compounded. Compounding interest is simply interest upon the interest upon interest. Many people do not realize the power of compounding interest in relation to time. Compounding interest can work for you or against you depending on which side of the balance sheet you are. The value of your money today, whether you borrowed it or invested it, will not be its value five, ten, or twenty years from now. This is what financial planners refer to as the time value of money.
But what if you are already waist or neck-deep in credit card debt? The first and foremost thing that you should do is to resolve within yourself. Resolve to get out of debt and stay out of debt. Insanity, as defined by Albert Einstein is “Doing the same things over and over again but expecting different results.” So, after resolving to get out of debt, it is time to act on that resolve. Start by making a list or inventory of all your outstanding debts including the balance, start date, and status. Then, using what financial planners call the snowball method, start paying off your debt with the lowest amount. Doing so is more achievable and realistic. After you have paid that off, you can now proceed to the next bigger debt and so on and so forth until you have paid off all your debts. When you see you debts getting paid off one by one, it encourages you to take on the next bigger debt unlike if you start with the largest debt, which might just end up in frustration due to its seeming impossibility.
There may be times of plenty when you will suddenly get to earn big bucks because of a lump sum payment such as an acceptance fee, packaged deal, success fee, or a new regular retainer fee. Other possible sources could be from bonuses, inheritance, awards, or even raffle prizes. Heck, you can even organize a garage sale for those stuff that you don’t actually use anymore and are just gathering dust in your attic or storage room! Be wise, pick your brain. Better yet, if you’re married, pick your spouse’s brain! Such unexpected income can be used to escalate your debt payments thereby accelerating your debt-extinguishment objective.
Be faithful in paying your debt; but more importantly, be faithful to God. Do not forget what we discussed previously. Tithe! God is the source of everything. If you worship him through your finances and acknowledge that the solution to your problem is him and not just money, then God will give you the ability to produce wealth (Deuteronomy 8:18). This isn’t easy, especially when you are in debt. Nevertheless, Jesus said that if we “seek first his kingdom and his righteousness…all these things will be given to you as well” (Matthew 6:33, NIV).
Last but definitely not the least—in fact, this should be the first thing you do—is pray. We cannot do it on our own strength. We need God’s wisdom and grace to help us in this situation. Remember to “Trust in the LORD with all your heart, and do not lean on your own understanding. In all your ways, acknowledge him, and he will make straight your paths” (Proverbs 3:5-6, ESV). For God promises that “If any of you lacks wisdom, let him ask God. Who gives generously to all without finding fault, and it will be given to you” (James 1:5, NIV).
May the LORD bless you and keep you;
May the LORD make his face shine upon you and be gracious to you;
May the LORD turn his face towards you and grant you peace. Amen.