Business
Debt Free and Loving It
For a couple of years now, I have had zero pesos outstanding balance in all my credit cards. Even here in the US, I always pay my outstanding balance in full every time. It's not just me. A lot of personal finance articles out there stress the need to be credit card debt-free, and for good reason.
Big ticket items like a house, or even a car, may be purchased on credit. Sometimes it just makes sense. A house or some other piece of real estate usually appreciates, so the interest you pay may be equal to the increase in value. Unlike most card purchases, real property doesn't go away or gets used up. While a car does depreciate over time, and the interest payments are a huge expense, you are actually paying for convenience.
I too was trapped in credit card debt at one point. A steady job allows you to get one, maybe two. I had three. But credit card debt interest is so unreasonably high that if I paid the minimum amount each time, and my debt was already near the credit limit, I end up paying 800 pesos a month in interest alone. That's a single guy's groceries for half a month, or a week's groceries for a small family. And I had three credit cards, that's 2,400 pesos a month in interest! For years I paid that much. If I put 2,400 a month in a checking account for two years, I would have saved 57,600 pesos, even without interest. I might have bought twice the amount of goods I bought initially with my credit card.
It did look like free money. You can buy now, pay later. And it was a drug. I fell for it. It's like always having the money to buy things, even if you didn't have the cash. Of course, that's what the banks want you to think. You pay regularly, become a good customer, and they double, even triple your credit limit. And you think, great! More free money! But that's really not the case. The interest you pay, at 3.25% or even 3.75% per month, should make you think twice.
I wised up only after four years of this. I took a loan that would pay off all my credit cards, and I pay a fixed amount for two years, with a fixed interest rate, which was substantially lower than what the credit card companies were offering. If you can borrow from your parents without interest, that would be a better deal. That way, you don't pay any interest at all, and you are one step closer to being debt free.
But that's only the first step. You have to have the discipline NOT to buy anything on credit. You have to control your spending, and tell yourself to go saving up for that big purchase. In the Philippines, even those zero-interest deals are not really zero-interest. The purchase price when using a credit card is actually anywhere from 3 to 10% higher than if you paid in cash. If a TV was on sale for 30,000 pesos, 0% interest for 12 months, you pay 2,500 a month. But if you paid in cash, you would only pay 28,500. That's 1,500 pesos in savings.
And then you'll say, but I don't have 28,500 pesos right now. That is the tricky part. So the key here is actually to anticipate your purchases, to save up for those big ticket items. If you had the foresight a year ago that you wanted a new TV now, and saved 2,500 pesos a month, at 4% per annum, you would have about 30,600 pesos now. You buy the TV for 28,500, and have 2,100 or so in change to buy other things, or reinvest, and continue to save 2,500 a month until the next big purchase.
Part of the discipline is setting aside money for big purchases. But part of it is controlling small purchases as well. A shirt here, a couple of CDs there, shoes - eventually these add up. Again, if you set another chunk of your money for these purchases, and plan them ahead, then you can escape the need to use plastic.
Today, I keep a list of items that need to be purchased and when. I also set a budget, so I know how much to save. And with that list, I also get to ask myself if I really need those things at the specified time. The new TV can wait, because the old one is still chugging along, and it was given to us for free. I was holding off purchasing a sofa because we didn't know how long we were going to stay in the apartment. Now that there's some clarity, I can buy one now, because I've been saving for it.