MANILA, Philippines - Getting into debt is a situation that most people would rather avoid. However, there are some instances when getting into debt is unavoidable – and actually good for you.
Consulting several personal finance books, one will find that not all debts are bad – there is such as thing as good debt. A debt is considered good when you expect to get a much higher return from the amount you originally borrowed.
Getting a college education, buying your own home, and growing your own business — these are the types of endeavors that make getting into debt worthwhile. Let’s go through each one of them.
Securing your future
Getting a college education is a costly pursuit. Depending on the university, tuition fees per semester can go as high as P75,000. Such amounts do not include other related expenses such as books, meals, and transportation. This assumes that you are looking at completing a degree in the Philippines, and not overseas, a scenario that will mean at least double the cost.
If you factor in the four years it takes to finish a typical college degree, then you are looking at spending anywhere from P160,000 to P600,000 on tuition fees alone. Some families may find such amounts burdensome, especially those that have several children, and may inevitably take out personal loans to finance their children’s education.
The cost of taking out a loan however, pale in comparison to the infinite rewards of a college education. Rather than thinking of college education as an expense, look at it as an investment. Graduates of information technology, for example, earn anywhere from P30,000 to P60,000 from the get-go.
If you consider all the costs plus interest if you had to take out a loan, the total may be earned by the new graduate in less than two years.
More importantly, a college education opens many doors of opportunity. Apart from giving the graduate the right set of skills and expertise to excel in his chosen field, it is also in college where he gets to build his network of friends and acquaintances. This is a valuable asset that may contribute to his future success.
Buying your own home is another worthy endeavor that can be classified as good debt. Apart from providing you with a roof over your head, your home also makes for a good investment as it increases value over time.
Looking at historical trends, you can expect your home to appreciate in value by 3 to 5 percent annually. This is far better than the 2 to 3 percent that you get from savings accounts and certificates of deposits. And while stocks and bonds offer better yields, there are few other investment options where you can actually borrow against your capital.
If you are looking to get the most out of your money, you must remember three things when it comes to real estate: location, location, location. There are hot-ticket locations today with land values experiencing double-digit growth over the past few years. These values have no way to go but up, with Manila’s growing popularity as a real estate investment destination in the global arena.
Buying your own home is a momentous decision, so before you take the plunge, check your level of commitment and means to pay. At most, you should only dedicate about 20 to 25 percent of your monthly income to home payments. Make sure too that you can shell out at least 20 percent of the purchase price as down payment.
Last but not least, there is what we call business debt. These are borrowings related to growing your own enterprise, which could ultimately translate to better profits for your company.
But of course, you have to be very discriminating as to why you need to borrow money in the first place. A piece of equipment that can make for efficient operations or inventory that you can dispose of quickly to improve cash flow—these are moves that can give your business a boost.
However, if you are going to borrow money just because you want to move into a nicer looking office or because you want to purchase new office furniture when the existing ones work just fine, then forget it. It is also important not to rely too much on borrowing to grow your business; finding investors is the better option.
The most important thing to remember about a good debt is that it’s still debt. At the end of the day, a good debt represents an obligation that you must fulfill. If you do not do so, then it will inevitably turn into a bad one.
Grow Your Money is an editorial partnership between ABS-CBNnews.com and Citi Philippines to promote financial education and provide helpful information to Filipinos on how to better manage their personal finances.
Visit www.citibank.com.ph for more information.