Debt is death to those who abuse it
QUESTION: I have heard that stock market investing has made lots of money for other people. But I also have a significant amount of debt payments that I make in a month. Do you think it would be wise for me to just borrow so that I could invest in the stock market? Your advice will be greatly appreciated. – asked at “Ask a friend, ask Efren” free service available at www.personalfinance.ph and Facebook.
Answer: Please do not allow the tectonic plates of debt drown you in a tsunami full of woes. Debt is good. But as the saying goes, too much of a good thing can also be bad.
With too much debt, you will eventually end up falling behind on your payments.
This past due record can ruin your name and make it difficult for you to borrow money in the future, open bank accounts and sometimes even open investment accounts.
Needless to say, a low to negative net cash flow due to debt payments will make your present life miserable and prospects for reaching your future goals dim at best.
Put another way, you will have effectively mortgaged your future.
On top of the ill effects of having too much debt, borrowing to invest raises your required rate of return because any profits from investing must not only be enough to cover your future goals but also the debt that has to be repaid.
Credit scoring is coming to the Philippines as early as 2017. Credit scoring will make it easier for lending institutions to know “how much a person owes, how deep their credit lines are, and how many loans from how many anonymous institutions they have.”
So as the song goes, you better watch out, you better not cry, you better not pout…credit scoring is coming to town.
I know your deep regret on missing out on the opportunity to invest. But guess what, while the potential return on investing in stocks is great, the guaranteed cost of debt can be greater.
If you are a revolver of credit card debt, meaning to say you just pay the minimum amount required, you can be paying as much as 3.5 percent per month in interest or 42 percent per year (i.e. 3.5 percent x 12 months).
So paying down your debt can give you a guaranteed savings or equivalent return of 42 percent per year.
No stock can guarantee such a return.
It would be best for you to pay down your debts first to afford you enough cash flow savings to invest for a brighter future.
Do not be discouraged if things seem impossible at first.
Find comfort in this passage for the Bible: “Come to me, all you who labor and are over-burdened and I will give you rest. Shoulder my yoke and learn from me, for I am gentle and humble in heart, and you will find rest for your souls. Yes, my yoke is easy and my burden light.”
The Filipino phrase “bahala na” is said to come from the phrase “bathala na,” which means I will do my best and God will do the rest.
So you must do your share in making your burden lighter.
For starters, find out why you ended up with significant debt in the first place.
Was the reason out of frivolous spending like unbridled shopping or was it from huge necessary expenses like shouldering the medical expenses of a loved one.
If the reason was from unnecessary spending then you already know what to do.
If it were from huge necessary expenses, then you would need to set up a sinking fund for when such expenses are next incurred, whether they are predictable or emergency in nature.
The question still remains on how to set aside money for such necessary expenses.
There are three solutions.
To alleviate your cash flow problem arising from too much debt repayment, you can go for refinancing (typically when you still have a good repayment track record), restructuring (recasting the schedule of debt payments with or without a reduction in interest rate) and/or partial debt condonation.
When it comes to credit card debt, refinancing is had through balance transfer or getting one card company to pay off your outstanding balances with other card companies and repaying the new loan not next month but over several months.
Restructuring and/or partial debt condonation is done usually when collection agencies are already the ones hounding you.
If you want to know more about effective debt management, check out the free tools at www.personalfinance.ph.
You can also attend our EnRich™ Wealth Creation and Preservation training or our Financial Planner’s Training program for the cities of Mandaluyong, Zamboanga, Baguio, Iloilo, Davao, Cagayan de Oro, Ormoc, and Cebu. Check our website for the details.
(Efren Ll. Cruz is a Registered Financial Planner of RFP Philippines, personal finance coach, seasoned investment adviser and bestselling author. Questions about the article may be sent by SMS to 0917-505-0709 or emailed to [email protected]. To learn more retirement and investing, attend our FREE personal finance talk on Nov 26 at PSE Ortigas. To register, e-mail [email protected] or text <name><e-mail> <RFP> at 0917-9689774.
