Good debt is good if you use it to enhance your life or to increase your net worth by buying assets like stocks and mutual funds, investing in your education, buying a home, or starting your own business. Borrowing money can also improve your credit score and credit history.
Bad debt is bad if you borrow money to buy depreciating assets and it won’t generate income like buying cars, gadgets, clothes, and other consumables. I know that we have our own wants and needs, but if we have to buy these items by borrowing money or using a credit card with a high-interest rate then it is not a good idea.
There are also debts that we cannot consider good or bad but we still borrow money because we have medical emergencies and health insurance is not enough to pay the hospital bill. When we are dealing with financial difficulties especially during this global pandemic that a lot of people lost jobs and closed their businesses.
Nowadays, borrowing money is not difficult, you can borrow from family, friends, companies, credit cards, and other private or government financial institutions. Some need a lot of requirements and some do not need a lot of documents but you won’t have peace of mind because they won’t stop bothering you unless you settle your unpaid debts.
According to Henry Wheeler Shaw, “Debt is like any other trap, easy to get into, but hard enough to get out of.” It is true that is hard to get out of debt but being debt-free boils down to how bad we really want to get out of it. Sharing some tips on how to avoid bad debt with the right strategy.
How to Avoid Bad Debt With the Right Strategy
1. Live a Simple Life
Cliche as it may sound but if we live a simple life or live within our means, we can save money. Remember the famous quote of Will Rogers? “Too many people spend money they haven’t earned, to buy things they don’t want, to impress people they don’t like.” We’re living in the digital age where people post a lot on social media about their recent purchases, food trips, or travel experiences. But you don’t have to do the same thing if you don’t have the means. Change your spending habit and practice delayed gratification. Don’t borrow money for the sake of showing off.
"Keep your life free from the love of money, and be content with what you have." - Hebrews 13:5
2. Learn to Save Money
I was not born with a silver spoon so when I was still a kid, I always save money. I saved money from my allowances, birthday, and Christmas gifts so I can provide for my future needs without asking anything from other people. And I continue this saving habit until I got my first job and until now that I’m married.
There are several ways to save money but these are the saving tips I followed since I started saving.
A. Have a Budget
Dave Ramsey said, “A budget is telling your money where to go instead of wondering where it went”. Having a budget will make your life easier especially during payday. You already know where to put your money like tithes, investment, savings, and whatever is left is for the monthly expense. Budgeting always helps me not to overspend, so I try my best to stick to my budget when traveling, shopping, eating, celebrating special occasions, and even buying gifts.
B. Open Savings Account
Some people use a money envelope or jar system but I prefer opening a Savings Account if I am saving for something like travel or education fund. At least, you are gaining a small interest than keeping them on the envelope or jar. You can avoid the temptation because the money is out of sight.
3. Use Credit Card for your Own Good
Other people dislike credit cards but like debt, a credit card is not evil if you know how to use it properly. You can avoid credit card debt if you pay your dues in full. Don’t just pay the minimum due because you will drown with a high interest rate. You can read more about this in my post “How to Save Money by Using Your Credit Card”
4. Prepare for Rainy Day
No matter how we plan our life we cannot predict our future. There are things that we cannot avoid like unemployment, medical emergencies, accidents, home repairs, calamities, and even family emergencies so it is very significant to prepare for these bad circumstances.
In order to avoid debt, let us prepare for the rainy day like saving at least 6 months of your monthly salary, save money for education, invest in health and life insurance, buy a memorial plan, and lastly, do not forget your retirement fund because SSS pension is too low.
5. Do not Co-sign Loans
I know that it is hard to say no to family and friends but as much as possible do not co-sign loans because you might end up paying their loans. Sometimes, there are people who will file loans to help their family and friend or allowing them to use their credit cards but ended up paying the debts that they did not use. It happened to a few people I know, it was a sad reality, ikaw na tumulong in the end ikaw pa naghirap.
"Before borrowing money from a friend, decide which you need most" American Proverb
These are just a few tips to stay out of debt, it is easier said than done but we all know that we just need discipline and determination to avoid bad debts. There are no shortcuts, but we can do this, one step at a time. And let me end with this quote, “Every time you borrow money, you’re robbing your future self” - Nathan W. Morris