3-step approach to solving debt problems
Question: I am drowning in debt. My income is simply not enough to pay the monthly amortizations, even the minimum required payments. Many times, I get a headache just thinking about the next payment due date. What can I do?—Plant Worker
Answer: February is known to be the month of hearts. So let’s talk about your heart. Did you know that in an average lifetime (according to the Philippine Heart Association), the heart pumps 3 billion times? But some don’t reach that many heartbeats because they die early of heart disease. Heart disease kills more people in the world than any other disease or sickness. And what is the leading cause of heart disease? It’s hypertension. In the Philippines, 20 percent of individuals suffer from hypertension more commonly known as high blood pressure. With symptoms not readily manifesting themselves, hypertension is also known as the silent killer.
What are the leading causes of hypertension? These are a high fat and salt diet, being overweight, the lack of exercise, excessive alcohol intake, smoking, unsupervised medication, and excessive physical, mental and emotional stress. Your huge debt problem is already giving you high stress and making you a candidate for developing hypertension.
So how should you manage your debt problems and hypertension? Follow the Personal Finance Advisers’ or PFA’s three-step approach of:
1. smiling;
2. talking to your creditors, and
3. staying debt-free.
By smiling with your eye and mouth muscles and bundling that smile with laughter, you will produce endorphins, the body’s muscle relaxant. This act will not only counter your stress but will also make you ready to talk to your creditors.
Be warned: your smile has to be sincere. A half-baked smile will not win you sympathy from your creditors. Take the world’s most famous smile, that of Mona Lisa. Did you know that her type of smile indicated that she was not fully happy? The University of Amsterdam came out with emotion-recognizing software and ran it through the painting. The University found that Mona Lisa was only 83-percent happy, 9-percent disgusted, 6-percent fearful and 2-percent angry.
When you are already in the proper disposition, you can now talk to your creditors. Creditors are not emotionally bankrupt. Who knows, they too may be suffering from debt problems. Talk to them about the possibility of:
1. getting a discount on interest and penalties;
2. getting a discount on the principal, and
3. repaying your debt over a longer period of time.
Recent international news bannered headlines on the European debt crisis. Currently at the front and the center of this debt crisis is Greece. It is said that Greece’s outstanding debt is much higher than its annual income. So what has the country resorted to?
Greece is asking its creditors to take a 50-percent cut in the principal that is owed to the latter plus a repayment of the balance over a longer period of time and at a lower interest rate. At PFA, we have several clients who were given a 50-percent discount on their past-due debt obligations. In absolute amounts, these discounts ranged from a low of P50,000 to a high of P17 million.
Whether it’s Greece or you, getting a discount on interest, penalties and principal plus repaying the balance over a longer period of time affords a lower cash outflow for debt payments. This will give you elbow room in running your finances and will probably even allow you to save. Please note, however, that the savings should be used to accelerate debt payments as a longer repayment period also means more interest. Do not attempt to invest such savings as it is always best to protect your downside first. Your interest expense from your debts is guaranteed while your returns from investments are not.
Lastly, the concessions you get from your creditors will not be without something in return. For Greece, creditors are asking for austerity measures to be put into effect. For you, creditors may ask for a token up-front lump sum payment. Nevertheless, you still have to implement your own austerity measures.
Your self-imposed austerity measures will help you avoid contracting new debt. And if Steve Jobs says you shouldn’t live someone else’s dreams, so too should you not live someone else’s income level. In other words, live within your means.
If you want to learn more about debt management as well as effective cash, risk and wealth management, attend the EnRich training scheduled on February 16. Wealth management includes investing in financial securities as well as investing in your own business. Visit www.personalfinance.ph, e-mail [email protected] or call (632) 216-1541 for more details.
Don’t forget to smile in the face of stress.
(Efren Ll. Cruz is a registered financial planner of RFP Philippines, personal finance coach, investment adviser and bestselling author. Questions about the article may be sent by SMS to 0917-505-0709 or e-mailed to [email protected]. To learn more about the RFP program, visit www.rfp.ph or e-mail [email protected].)
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