credit card debt

Feb

2022

Warning Signs That You are Living Beyond your Means

Reading Time: 5 minutes

To live beyond your means simply means that you are spending more than what you can afford. Statistics show that most people are living from paycheck to paycheck without any kind of financial cushion. This was quite evident on the effect of the recent lockdowns on people’s financial lives. While we all deserve to spend our hard earned income; spending beyond our earnings, not saving enough for emergencies and racking up debt in the process are all recipes for financial disaster. To prevent this from happening, you need to watch out for some warning signs that you are living beyond your means. Even if you were doing fine before the pandemic, you might still need to reassess your finances to check if your current income can still support your previous lifestyle.

It is quite easy to fall prey in this age of consumerism. A wide range of consumer goods are available everywhere in the malls, supermarkets, social media and online stores. With heavy promotion by the media coupled with the support of the banking system through their generous credit to consumers; living beyond your means is so easy to do these days.

The FOMO (fear of missing out) and YOLO (you only live once) mentalities brought about by social media only made matters worse. These mentalities have become the new norm that they have dictated the spending habits of many. While it gives you satisfaction in the present, it gives disservice to your future well-being.

Warning Signs That You Are Living Beyond Your Means

Before it is too late, here are some key indicators that you are living beyond your means. They will serve as warning signs that it is time to scale back on your spending immediately.

1. More than 30% of your Income Goes to your House

Housing is the largest expense of most households. Most people dream of a big nice house thinking that they are buying an asset. However, most people don’t realize that their primary home is no longer considered an asset but rather a liability.

Unless you have a way of lowering your monthly expenses on other parts of your budget, you will find yourself in the poverty cycle if you are spending more than 30% of your income on your house. The allure of a bigger and better house will become a financial problem.

Now, calculate what percentage of your monthly income goes to your housing expenses. Housing expenses include your monthly amortization, real estate property taxes, association dues, house insurance, maintenance costs and utilities. If the amount exceeds more than 30% of your monthly income, you will be much better off finding a less lavish home that will fit your budget.

2. More than 15% of your Income Goes to your Car

If you can purchase your car for personal use in cash, then there is no problem. Problem arises when you borrow money in your auto loan purchase.

Have you heard of the 20/4/10 Rule on Auto Loan? The 20/4/10 Rule keeps your finances in check when it comes to purchasing a car. The rule says if you are going to buy a car, you need to make at least a 20% downpayment. In addition, the terms of payment should not exceed 4 years and that your monthly amortization should not exceed 10% of your monthly earnings. If you cannot follow these rule, it simply means you are buying a car that you cannot afford.

Minimum 20% downpayment
Maximum 4 years term
Monthly payment should not be greater than 10% of income

If you add up all other transportation expenses like fuel, maintenance costs, insurance and your monthly amortization; the total should not exceed more than 15% of your income. If your monthly transportation expense goes beyond that, you are simply living beyond your means.

3. Overdue Notices Fill Up your Mailbox

If you have been receiving late payment, overdue and disconnection notices, or worse you find your utilities constantly disconnected; then that’s clear sign that you are living way above your means. Your monthly budget should include payments for bills and utilities. If you can’t pay for them then it is time to reevaluate which ones are necessities and which ones you are better off without like cable subscription for example.

4. You Borrow Money from Others

If you find yourself borrowing money from friends and relatives or take out personal loans to pay your bills then that is a clear sign that you cannot afford your current lifestyle. Ideally, your income should be enough to cover your day-to-day expenses.

5. You Constantly Worry About Money

You are constantly worried about money, even with small expenses to the point that it is already keeping you awake at night. Your health is already affected. You even get into strenuous discussions and arguments with your spouse.

It is normal to worry about your finances every now and then but if you are constantly experiencing these things on a daily basis. Then, it is so obvious that you have money problems.

6. You have No Savings / Emergency Fund

You have no savings or emergency fund. Even if you have it before the pandemic, you have already used it all up. There is no money left from your current income to set aside for future savings.

Savings are needed for future use. An emergency fund is for unexpected and unfortunate events like a pandemic, unemployment, illness, disability or simply for car repair purposes. Ideally, your family should have enough money saved to cover at least six months worth of your living expenses.

7. You have Rising Credit Card Balances

If you are one of those people who only pays the minimum amount due on your credit card balance every month, then that’s a sign that you are living beyond your means.

Ideally, you should only charge what you can pay off at the end of each billing cycle. Unfortunately, many people have severe problems with credit card usage. If you don’t pay the total amount due on or before your due date, your outstanding balance will charge additional interest rates and fees, and these are carried over every month causing your debt to balloon month after month.

8. You Never Set A Budget

If you are ask questions about your budget like how much do you spend on food each month and you have no idea what the answer is, then you have a problem. A written budget is one of the first and most important steps towards financial freedom. How will you know if you are living within your means if you have no idea where your money is going? Having f inancial goals and sticking to your budgeting plan can prevent money leaks and help you live within your means.

9. You Run Out of Money Before your Next Paycheck

Do you find yourself short of cash long before the next payday? If you do, then that is another sure indicator that you need to downgrade your lifestyle. Your paycheck should be enough to cover your expenses for the period.

10. You Shop / Vacation on Credit

Credit is good when used wisely. It is very convenient because you don’t need to pay in cash for the total cost of an item or service right away. It is fine to avail of zero percent installment offers just as long as you are sure that there are no hidden charges. The rule of thumb is that your payment terms should not exceed the total life span of the item that you are buying.

It is a whole different thing for trip purchases. Yes, you can go on that well-deserved vacation only if you have saved enough for it. Make a plan to save money for that dream vacation.

You can use your credit card for protection. Like for example, some credit card offers free travel insurance if you book using their card. All other vacation expenses should be paid in cash. You can also use your credit card during vacation but for emergency purposes only. If you are one of those people who loves taking vacation all on credit, then you are living beyond your means.

If you score at least four and above, then take it as a warning sign that you are living beyond your means. You have two options, either you increase your income or downgrade your lifestyle. But whatever your choice is, it is best that you start learning financial literacy now to avoid finding yourself in the same situation later on.

Edited Version. First Published in Pinoy Smart Living on 10.30.2018

Photo by Artem Beliaikin from Pexels

Jul

2021

Understanding Your Credit Card Statement Part 3

Reading Time: 3 minutes

There is a price for borrowing money. Aside from the annual membership fee, one of the most important things that you should consider is the interest. This is how the credit card issuer earns money. Understanding the different credits and debits that go in and out of your credit card statement is one of the skills that you need to be able to use your card wisely. Don’t just swipe, understand how your credit card works. Here is understanding your credit card statement part 3.

9. Interest Rate

The interest rate is the cost of borrowing money. The interest is applied only to your balance. Different cards have different interest rates. Card issuers use different calculations. Some credit cards issuers calculate it based on your average daily balance. Some use the balance on the beginning or the end of the cycle. You will need to read the fine print to understand how your credit card company calculates the interest.

TIP: You can avoid paying interests by paying the total amount due on each billing cycle.

10. Cash Advance Interest Rate

Aside from the cash advance fee, there is a separate interest for your cash advances. This is typically higher than the interest rate of your regular purchases.

TIP: Cash advance interest rate is not only higher than normal transactions, it is also automatically charged as soon as you withdraw the cash. Avoid this by using the cash advance feature of your credit card only when absolutely necessary.

11. Previous Balance

The previous balance pertains to your outstanding balance from the previous month’s statement. Interest starts the end of the beginning of the billing cycle if you have a previous balance.

For example if you have a 5,000 outstanding balance from the previous billing and you paid 4,000 last month. You will then have 1,000 balance at the end of the beginning of the current month cycle. This means the interest will be calculated on the 1,000 balance at the start of the billing cycle.

TIP: Always make it a point to have zero balance at the end of the beginning of the billing cycle so you don’t need to pay any interest.

12. Purchases and Advances

This pertains to all your credit card purchases and cash advances that falls within the billing cycle. The billing cycle is the period after the statement date from the previous month to the statement date of the current month.

TIP: Make sure to keep all your credit card receipts so you can verify the transactions in your credit card statement to avoid paying for double entries or purchases that you did not do.

13. Credits

Credits are any amount that the card company owes you. It could be price of something that you returned that you originally purchased using your credit card. It could be wrong entries or items that you did not actually purchase.In addition, it could also be credit card points that you redeemed in exchange for cash credits.

TIP: Be consciously aware of your purchases and if you are expecting credits into your account. Ensure that the correct amount has been credited.

14. Payments

Payments are the amount of money that you pay the credit card for your purchases. Any payment you made will reduce your outstanding balance.

TIP: Double-check all payments credited to your account to make sure it is the correct amount.

15. Interest Charge

This is the total amount of all the interests that were charged to your account. It is the sum total of the interests on purchases, cash advances and balance transfer.

TIP: Although you can avoid paying interests on purchases if you pay within the grace period; you cannot do the same with cash advances and balance transfers because they are automatically charged right after the transaction.

16. Late Charge

Late Charges are the amount that you need to pay as penalty for not paying at least the minimum amount due before the due date.

TIP: Avoid paying late charges by paying your dues on or before the payment due date.

Third Part of a Series. Click here to read Part 1.

First Published in Pinoy Smart Living on 04.06.2019

Feature Image by Alina Kuptsova from Pixabay

Jul

2021

Understanding Your Credit Card Statement Part 2

Reading Time: 2 minutes

Credit cards are a good way to build your credit score standing. Banks and other lending institutions use credit scores to assess and evaluate the potential risk of lending you some money. That’s why it is important that you use your credit card wisely. The only way to achieve this is by understanding your credit card statement and how it works. In this second part of the series, let’s focus on the credit limit. Below is a list of additional terms and description in understanding your credit card statement part 2.

Understanding Your Credit Card Statement Part 2

Credit card issuers put credit limits on your credit card for a good reason. The limits are there to benefit both you and the credit card issuer. The amount is based on a computation that it is easy for both parties to manage the credit. Your limits are normally based on your capacity to pay. Being consciously aware of these limits will help you be able to utilize your credit card well.

5. Credit Limit

Your credit limit is the maximum amount that you can borrow on your credit card every cycle. The amount is decided by the credit card issuer based on certain factors such as your monthly income, credit score and account history.

TIP: Keep your credit limit in check. Going over your credit limit will result to hefty penalties and affect your credit rating.

6. Overlimit Amount

Any amount in excess of your credit limit is the overlimit amount. The overlimit amount is subject to penalties. It is also added up to your minimum amount due.

TIP: Avoid the embarrassment of an unapproved or declined transactions by making purchases above your credit limit. In addition, do bear in mind that there are penalties when you go above your credit limit. And besides, going above your credit limit means your credit card usage is already more than your capacity to pay.

7. Available Credit Limit

This is the amount available for you to spend. It is actually your credit limit minus your total amount due less any other pending transactions.

TIP: It is advisable to always have an available credit in your credit card for emergency purposes. In addition, having a lot of available credit limit at any given time is good for your credit score.

8. Cash Advance Limit

The cash advance limit is the maximum amount that you are allowed to withdraw in cash. Some credit cards have the same credit limit and cash advance limit while others set a separate amount for cash advance.

TIP: Never use the cash advance feature of credit card unless you really need to or there is urgency in the situation. Although it is a convenient way to get cash fast, the interest rate for cash advance is much higher compared to personal loans.

First Published in Pinoy Smart Living on 28.06.2019

Feature Photo by Andrea Piacquadio from Pexels

Jul

2021

Understanding Your Credit Card Statement

Reading Time: 3 minutes

Many people have the bad habit of not reading their credit card statements. For those who do read, how many really understand what it all means? It is because of this that many people found themselves in credit card debts that have already escalated beyond their control. Don’t be one of these people. Understanding your credit card statement is crucial to your journey towards financial freedom. Use credit cards to your advantage. Learn how credit cards work.

To truly understand how a credit card can be good for you, you need to first be able to read and decipher your credit card statement. The small pieces of information in your credit card bill are all equally important. They can aid you with proper use of your credit card.

If learning about all those terms in your credit card statement all at once is too much for you to handle, at least start with the four most important ones:

1. Statement Date

This is the date that your billing statement is prepared. The date is important simply because it is the cut-off date. All transactions made after the previous month’s statement date to the date indicated are included in the statement.

TIP: If you think you have already reached the limit of your monthly expense budget, wait until after the statement date to make your purchase. In this way, you will have more than a month of grace period before you need to pay for that particular purchase. For example; if your statement is generated every 5th of the month, items that you bought before the 5th will be billed this month. Purchases after the statement date are for next month.

2. Payment Due Date

The payment due date is the last day for you to make your monthly payments. As long as you have a balance in your credit card, you are obliged to pay every month on or before this date. Although some credit card companies accept payments on the next banking day after a weekend or a holiday; some no longer do so because of the presence of automated online payments or phone banking.

Take note however that the payment due date varies. Rather than a specific date of each month, it is normally set at 21 days after the statement date.

TIP: Make sure to pay on time so as to avoid penalties and late charges. You can opt to pay early but make sure you do it after the statement date otherwise, that payment would be counted on the previous month’s billing cycle. Also, always take note of the due date because it varies every month.

3. Total Amount Due

This pertains to the total amount that you have used in your credit card that you are liable to pay the card issuer. It is your outstanding balance.

TIP: Although you are not required to pay the full amount on the payment due date; it is in your best interest that you do so. Any outstanding balance will begin to incur high interest charges.

4. Minimum Amount Due

The minimum amount due is the lowest amount that you are required to pay on or before the payment due date. It is typically a small percentage of your outstanding balance. This is directly proportional to your total amount due. The higher your outstanding balance, the higher your minimum amount due and vice versa.

TIP: Never miss paying your minimum amount due on or before the payment due date. You will not only be subjected to late charges, it will also affect your credit rating. Missed payments will affect your standing with credit institutions and might ultimately affect your capability in acquiring loans in the future. In addition, even if you pay the minimum amount, if you continue to make purchases each month, your balance will continue to grow. This is the fastest way to put yourself in heavy debt. Thus, a word of warning; if you don’t want the power of compound interest working against you, then, refrain from paying just the minimum amount due each month.

First of three parts, click here for Part 2.

First Published in Pinoy Smart Living on 21.05.2019

Feature Image by lcb from Pixabay

Jun

2021

Use The Power of Compound Interest to Get Rich

Reading Time: 3 minutes

Have you ever been to any of the seven wonders of the world? They are so-called the wonders of the world because of their beauty and perfection. They were created by mankind in the past that are now revered in the modern world. In the world of investing, there is a principle that is dubbed as the 8th Wonder of the World. Albert Einstein called it “the most powerful force in the universe”, and that is compound interest. Anyone can use the power of compound interest to get rich.

Compound interest is the eighth wonder of the world. He who understands it, earns it. He who doesn’t, pays it.
– Albert Einstein

What is so nice about it is that anyone can use it to their advantage, regardless of age, gender, social status and educational background. It can create millionaires even for ordinary people.

What is Compound Interest?

Compound interest is the interest on loan or deposit. The interest is then added to the principal amount and accumulated through a period of time. Simply put, it is interest on interest.

To illustrate, for example you start saving $100 a month from the time you are 20 years old until you become 65 years old for your retirement fund. Let us say the fund gives 6% interest per annum compounded annually. By the time you retire at 65, you will have $475,471.46 in your account.

Compare the $475,471.46 with $66,000 which is the total amount you would have saved after 55 years of saving if you have decided to put your money under the mattress. That is the power of compound interest. Use it to your advantage, and it will work wonders for you. It is the key to wealth.

To take advantage of this principle, you need two things.

1. Investment

The first one is investment. For your money to earn interest, you need to invest first. Your piggy bank or your mattress will not give you compound interest.

There are many kinds of investment vehicles available out there from stocks, bonds, options, real estate, mutual funds, insurance, jewelries, antiques and many others. You just need to find one that best suits your personality and risk tolerance.

2.Time

The second thing that you need is time. As a general rule, the longer you have been saving, the more money you can expect to make. In short, more time means more opportunity for compounding.

Two-Edged Sword

However, compound interest is a two-edged sword. True, it can help you get richer but it can also help you get poorer; or worse it can even lead to bankruptcy. How? Through bad debts most especially credit card debts.

Most credit card companies use the power of compound interest to their advantage. This means that the interest incurred is applied to your principal amount each time you decide not to pay your total credit card amount due in time. What is more alarming is that compound interest is not added annually but rather to the balance amount to the end of each day.

Thus, compound interest is very beneficial but at the same time very damaging for you. In order to avoid this, make sure to pay the total amount due of your credit card on time. If you don’t have enough budget for it, practice delayed gratification.

Make compound interest your best friend not your worst enemy!

Feature Image by Pexels

May

2021

Common Sense Money Advice That People Don’t Follow

Reading Time: 3 minutes

Money has always been a top source of stress for most people. If not addressed, too much worrying about money can lead to serious physical and emotional problems. It can even result in a breakdown in relationships. How to solve money problems then? There are tons of financial advice that people probably already heard or read about. In fact, most of these advices are simply common sense yet one the greatest mysteries about life is that no one really follows them. It sounds so easy to do but for most people, it is very difficult to follow. Here are some of the common sense money advice that people don’t follow:

1. Spend Less Than You Earn

This rule is so simple. Just live within your means. Obviously, if you spend more than you earn, that will only spell debt. Even a grade schooler knows that if you subtract more than you add, you will end up with a negative number. You need to have financial discipline; otherwise, it will be very hard to create wealth. Avoid keeping up with the Joneses.

There are many ways to reduce your monthly expenses. It helps to have a budget. The money jar budgeting system is a good money management technique because it not only helps keep your spending in place, it also helps slowly build your wealth. If spending less is really not an option, then you need to look for ways to earn more money.

2. Understand How Credit Cards Function

How many people are buried in consumer debt simply because they do not understand how credit cards function?

Credit cards are very useful. With credit cards, you don’t always need to have cash. You can purchase anything without having to worry of paying them immediately. However, if you don’t have a basic understanding of how it works, credit cards can turn into your worst nightmare. Always remember that you are not using your own money when you purchase items using your credit card but rather you are borrowing the bank’s money.

Credit card companies use the power of compound interest to their advantage. Compound interest is a very powerful mathematical concept that you can use to increase your wealth. Unfortunately, it is a two-edged sword. If used against you, it is a sure way to financial bankruptcy. That is why understanding how credit card functions is a necessity if you have a credit card.

Unless you know how to manage your credit cards, it is better for you to refrain from using your credit card altogether. Use credit cards only in emergencies. Buying because it is on sale even though you don’t really need it is not a valid definition of an emergency.

3. Automate your Savings

One of the lessons of this pandemic is the importance of having a savings account. Life is unpredictable. Saving money can ensure financial stability in case of emergency.

Pay-yourself-first has always been the initial advice that wealth managers will tell you as the first step towards building your wealth. Unfortunately, most people would rather spend or pay everyone else first before themselves. Savings always comes last. Usually, people save using whatever it is that is left (if there is any).

The best strategy to avoid this scenario is to automate your savings. By regularly setting aside a fix amount through automatic savings, you will soon be able to build up your emergency fund. One of the wealth rules of the richest man from Babylon is to always save 10% of income.

4. Seek Help from Qualified Persons

If your financial woes are already big enough for you to handle on your own, then it is time to seek help from other people. If your problems are about money, ask a professional in financial planning to help you. If you cannot afford your own financial planner, then ask a friend who is an expert in handling money.Don’t just ask any friend.

The problem with most people is that they normally seek advice from friends or relatives who are close to them. However, they fail to consider if these people are also having financial problems of their own too.

Think of it this way, if you are in school and you are having problems with your Math subject, obviously, you will not ask your Filipino or Science teacher to help you. Instead, you will seek the help of your Math teacher or a fellow student who is good in Math because they are the ones who can help you.

Remember to always ask the correct persons for advice.

So, If you want to have a better financial life, it is best to follow the common sense money advice that people don’t follow.

First published in Pinoy Smart Living on 03.26.2019.

Photo by Monstera from Pexels

Mar

2021

Money Lessons You Wish You Learned in School Part 2

Reading Time: 4 minutes

How are you doing with your finances? Do you consider yourself financially stable? If you do, then good for you. If not, you are not alone. Most people are having problems with money because only a few are financially literate. Most of us have to learn financial lessons the hard way. Just imagine all the things that you could have done differently if only you know a thing or two on personal finance. Here are some more money lessons you wish you had learned in school Part 2 (click here to read part 1 ):

1. Basic Investing Skills

A lot of people are scared of investing. This is just natural; after all, who would not be scared of losing their hard-earned money. You probably heard stories of people losing all their money through bad investments.

However, savings alone are never enough. You need to invest your money too. This is where your knowledge on Investment Basics will come in handy.

True, investing involves risk but it is also a great way to increase your wealth. You can minimize investment risks through financial literacy. Familiarize yourself with the different investment vehicles available out there. For beginners, you can learn about bonds, funds and stocks. Depending on our risk tolerance, you can try for the more advance type of investing such as cryptocurrencies, foreign exchange and stock options trading. It is only through Investing will you be able to slowly build your passive income.

2. The Power of Compound Interest

Out of all the items listed here, compound interest is one topic that was surely discussed in school. Unfortunately, since a lot of people hate math, compound interest is nothing more than a numerical value calculated from a math problem. You probably forgot the formula on how to compute it by now. Big mistake!

Compound interest is probably the most important concept of personal finance. If used to your advantage, it can give you vast wealth. However, it is a double-edged sword. It can either make you or break you. If it works against you, it can lead to your financial downfall. Do you know of people who are buried in credit card debt? That is a clear example of compound interest working against them.

Compound interest is the eighth wonder of the world. He who understand it, earns it…He who doesn’t pays it.
– Albert Einstein

3. Time Value of Money

The time value of money is one the most important concept for investors. It simply state that the value of your money today is worth more than your money tomorrow. To put it simply, it means it is better to have your money with you now than at a later date.

This concept involves time. Time is literally money. The sooner you earn or have money in your hand, the faster you can have money work for you. If this concept was discussed in school, making decisions in life would have been a lot easier.

For example, a buyer wants to buy your property at the prevailing market price. You declined the offer hoping that somebody else with a bigger offer will approach you later on. There is no assurance when the next buyer will come. What if the next buyer comes after a year or two? Is it still worth the wait?

Another example is let’s say the luxury bag that you have always wanted to have is on sale. You decided to buy it to take advantage of the sale. You use your credit card for the purchase. Unfortunately, you were only able to fully pay the item after a few months. With the interests incurred during those amounts, you ended up paying more for the bag.

The time value of money is also at work in investing. The younger you start investing, the more money you will have in the future. This also applies to other things such as your health. Choosing the right food and exercising today will keep you healthy. This will save you money on medical expenses later in your life. In practical terms, don’t put off what you can do today for tomorrow.

4. Building Good Credit

Do you pay your bills on time? Establishing a good credit is probably one of the most important things that you can do in your life. A good credit history will make your life a lot easier. Whether you are buying a house or a car, applying for a loan or a credit card or even getting a job; a good credit score will come in handy.

A credit report is an explanation of your credit history. It shows if you have an existing loan, if you are applying for one and your balance. It also shows your capacity to pay and whether or not you are paying your bills on time.

This is very important in your financial life. A good credit history will make it easier for you to get a loan. It can also qualify you for a higher credit limit and lower interest rates.

5. How Credit Card and Interest Rates Work

Do you understand how credit card and interest rates work? Do you even know how to read your credit card statement? So many people do not understand how credit card and other consumer loans work. As a result, they end up with an enormous credit card debt.

Credit card can be good or bad depending on how you use them. Credit card is a financial tool that you can use as leverage. However, it is never a good idea to use credit cards to purchase goods that you cannot afford in the first place.

The bottom line is that financial literacy can help us make better monetary decisions in our lives. It will help us achieve financial freedom and avoid bad debts.

Teaching personal finance in school can help our children have a better future.

First published in Pinoy Smart Living on 09.18.2019

Photo by Julia M Cameron from Pexels

Sep

2020

How to Get Out of Credit Card Debt

Reading Time: 4 minutes

Credit cards can be a blessing and a curse. They allow you to spend for something even without cash on hand. However, if you don’t monitor your expenses well, you end up paying more than what you originally spent. If you don’t monitor your swiping sprees wisely, you could end up in credit card debt. I had seen this happen to several friends but I never thought it would happen to me. You then find yourself wondering how to get out of credit card debt.

Credit card debt is scary but it can be avoided and overcome.

I used my first credit card for a new cellphone and for the cellphone purchases of my 3 friends too. In the same month, we had lost our jobs (as we worked in the same company). I had no savings to back me up for the next months. I had to spend my last pay check to look for another job. In the meantime, my credit card debt was getting larger. My friends didn’t have the capacity to help with the payments at the time. What was I to do?

Are you are in the same situation? Are you trying to pay off more than one credit card? Here are some tips to keep you focused on overcoming your credit card debt.

Avoid creating more debt.

Needless to say, this is the first step you should take. Look at your current spending and find out where you can reduce your expenses. Avoid using your credit card for necessary expenses (e.g., food, utilities, etc.), use cash as much as possible.

Leave your credit card at home. This way, you don’t succumb to the temptation of whipping it out every time you are strapped for cash. If you just can’t help yourself, resort to some extreme measures. Some people actually freeze their credit cards, in the refrigerator, so they don’t have the convenience of taking it out.

Make sure to pay your credit cards on or before the due date. This is to avoid getting additional late payment fees added to your outstanding balance.

Be a smart and focused payer.

Educate yourself about your credit cards and pay your credit cards strategically. Talk to your credit card companies. Find out which credit card has the highest interest rate and total outstanding balance.

In general, you should pay off the credit card with the biggest balance or the biggest interest rate first. Aim to pay that credit card first as soon as possible. At the same time, you should still continue to pay for the other credit cards that you have. As soon as you’re finished with the first credit card, tackle the second one next. Repeat with the other credit cards remaining.

Some people choose to pay the credit card with the highest interest rate first. Others start with the credit card with the biggest outstanding balance first. Still others start with the credit card with the smallest outstanding balance. Choose the payment method that you are most comfortable with in your current financial situation.

Find out which credit card companies you can request payment arrangements with. Credit card companies offer payment plans too. You can pay a fixed amount every month until you pay off the full amount. This means that you don’t incur more debt from the monthly interest rate on top of your actual balance. The end goal of this payment arrangement is to eventually close your credit card account once you are fully paid. That’s one less credit card to worry about.

Close the gap with each payment.

As you pay for any of your credit cards, try to pay more than the minimum monthly amount required. Paying more than the required monthly minimum will help you reach your payment goals much faster.

If you are really on a tight budget, you don’t need to do this with each payment. Each time you have some extra cash on hand, pay off more than the minimum amount for your credit card. This means that you also avoid spending the money on something else. That’s hitting 2 birds with one stone.

Don’t close a credit card account that is not yet fully paid. If you are already thinking of doing this, stop immediately. Closing a credit card account that you have not fully paid will have harmful effects to you and your future.

Expect to be hounded with calls, letters and emails with threats of a court case. You might be able to endure it but your unpaid credit card debt may haunt your loan applications too.

Your unpaid credit card debt will reflect badly on your credit history. When you apply for a personal loan from a bank, they will take a look at your payment history. With your unpaid credit card, that’s definitely a red flag on your record. You may not be able to get a personal loan from any bank because of your unpaid credit card.

Also, when looking for employment, some companies do check their applicant’s background including their credit card history. Your shady credit card history may be standing in the way of your dream job.

Endure and learn your lessons.

One of the obvious ways for you to pay off your credit card debt faster is to create more income. You can use your talents to help other people and earn.

List down the things that you are good at. Write down the things that you love to do or would love to do. Be honest with yourself on this or seek the help of friends. Doing this can help you explore hidden talents. You may rediscover a passion that you have been putting on the back burner for a while.

Can you play an instrument or are you good at drawing? Offer to teach for a fee! Do you like to teach children? Be a tutor! Have you always wanted to share your passion for gardening with others? Now is your time to start sharing your knowledge and start earning!

There are many other ways to create income or additional income. You just need to have a clear focus on your goals. Be open-minded to new ideas and be brave enough to grab the opportunity.

Finally, don’t fret about the amount of your debt. By educating yourself and keeping your focus on your goal, you will eventually overcome it. Just don’t forget the lessons you learned along the journey so you can be a wiser spender in the future.

Updated. First published on Pinoy Smart Living on 2018.09.12.
Feature Image: Original Photo by Pixabay from Pexels.

Aug

2020

Assets and Liabilities in Personal Finance

Reading Time: 2 minutes

Do you know what an asset is? How about a liability? Many probably have an idea on what they are but how many actually understand these terms? True, it might sound boring for many. Unfortunately, these terms are part of the basic terms that everyone should know about personal finance. A deeper understanding of these two terms can lead to drastic improvement on the current stage of your financial life. So, what is the importance of assets and liabilities in personal finance?

Assets vs Liabilities

An asset is any resource that has monetary value. In short, in personal finance, an asset is anything that you own that has value. Your car, house, investments, cash and items such as antique furniture, artworks, watches, jewelries and even some luxury things are all considered assets.

On the other hand, liabilities are everything that you owe. They can be in the form of mortgages, loans, debts and any money that you owe others.

Net Worth

Your total assets minus all your liabilities is your net worth. Knowing your net worth will help you understand your current financial situation. If it is positive, then good for you. If it is negative, then it is a warning sign that you are living beyond your means. In addition, your net worth can serve as reference point in your financial goals.

Launch Challenge

Compute your personal net worth now. Knowing your current state of your finances will help you improve your financial life. Your current net worth will be your starting point in your financial journey.

1. Compute all your Assets

Start by making a list of all your assets. Your assets include the following:

Real Estate Properties
Automobiles
Cash deposits
Investments on businesses, bonds, stocks, funds, etc.
Insurance
Watches and Jewelries
Other items such as antiques, art works and luxury items

Then, place a monetary value on each one. Record the estimated current market value not the purchase price.

Add then add them all up. The total value is your assets.

2. Compute all your Liabilities

Real estate mortgages
Auto loans
Credit card balances
Student loans
Other personal loans

Add up all the outstanding balances to get your total liabilities.

3. Calculate Your Net Worth

Now, subtract your total liabilities from your total assets. Then, that’s your net worth.

Do this every month to monitor your progress. Your goal is to slowly increase your net worth.

Now that you know your net worth, it helps to keep this in mind each time you spend your hard earned money. Knowing your net worth will help you make good financial decisions.

Feature Image by Bruno /Germany from Pixabay Images

Feb

2020

Rules to Double Your Money

Reading Time: 3 minutes

It is nearly impossible to build your wealth by just relying on earned income. Warren Buffet advices that you need to create a second source of income. Savings alone is never enough for the value of your savings depreciates over time because of inflation. You need to learn to invest your money. Through investing, you are creating a way for your money to work for you. And before you know it, after a few years, your money will be doubled. Thus, it is for your own benefit to understand the rules to double your money.

There are many investment vehicles to choose from. A wise investment should beat inflation. It should also increase in value over time. Moreover, it should also help you achieve your financial goals.

The Rule of 72

The Rule of 72 will come in handy if you want a quick way to estimate the returns of a particular investment. It is a simple way to find out how long it will take for your money to double given a fixed annual rate of return. It can help you determine how good (or not) a particular investment is.

Time to Double Your Investment = 72 / Rate of Return

For example, if you are going to invest your money in a 2% return, that’s 72/2 = 36. It means that it would take 36 years for your money to double. A 3% return will take you 24 years, A 4% return will take 18 years and so on and so forth.

Watch the video from Alliance Group for a simplified explanation of the Rule of 72.

This rule can be used not just in investment but in anything that grows at a compounded rate. That is the reason why it is also important that you understand the concept of Compound Interest.

Compound Interest

Compound interest can either be your best friend or your worst enemy. It all depends on how you use it. You can either gain from it or you can loose a lot because of it. Your life can be much better or much worse than you already have. It’s your choice.

What is compound interest? Compound interest is the adding of interest to the interest earned on the principal amount. In short, it is interest on interest. The interest is reinvested again and again and added to the principal amount. Because of this, the balance don’t just grow, it grows at an increasing amount.

Watch the Youtube video by Investopedia to better understand what compound interest is.

Compound interest can either be good or bad, depending on how you use it. It can be good if you use it on savings or investments. It can be bad, if you have debts.

Compound interest is the eighth wonder of the world – Albert Einstein

If you understand the concept and take advantage of it, you can learn a lot from it. The original amount that you have saved and invested will grow at a rapid rate. An investment left untouched for a couple of years can add up even if you do not add anything later on.

The chart above shows that supposed you invest $1,000 for 20 years and just leave it there, your money will grow up to $7,250 at 20% compounded annually even if you don’t add anything during that period. This is high compared to $3,000 value of simple interest.

That is the power of compounding. It will help you achieve wealth even if you don’t lift a finger. Compound interest is one the main reason you should learn to invest your money. Make it your best friend and it will do wonders in your life.

On the other hand, compound interest can also work against you. If you have debts, compound interest can become your worst nightmare. In the same way that savings can increase, debt can also increase at a rapid rate.

An example of this is credit card debt. If you only pay the minimum amount due, interest charges are accrued. By paying the minimum amount due, you are actually just paying a portion of the interest. Instead of lessening, the principal amount remains the same and additional interests are added causing your debt to balloon. If you keep this up, it will become problematic in the future.

Don’t make the mistake of making compound interest your worst enemy.

Updated Version. First Published in Pinoy Smart Living on 11.27.2018

Feature Image by Posted by A.L. Jonas in Financial, 0 comments