| Helping You Plan for your Future

Not all debts are bad. There are “good” debts and “bad” debts.

 

Good debts are loans wherein the amount is used to fund something that would earn money which would exceed the cost of borrowing it. Simply put, this means borrowing money to earn you more money. A simple illustration is a person who borrows Php 1M at 10% annual interest to start a new business which could give him around P 300,000 – P 500,000 net income (income less all expenses and debt payments) a year. This is a good debt since he is paying P 100,000 interest while he is earning P 300,000 – P500,000 a year.

 

On the other hand, bad debts are loans with interest charges which only put money out of your pocket. Simply put, this means borrowing money that does not earn you more money. An example is purchasing several items using a credit card wherein the corresponding bills are not paid on time which would result to credit card charges and interest.

 

Managing debts is a part of a proper financial management. It does not only affect the financial condition of the debtor but also affects his/her relationship with the creditor. Always put in mind that the debtor is a slave to the creditor, not literally but figuratively.

 

Debts should be evaluated properly and payments should be prioritized according to its true / effective interest. As much as possible, bad debts should be reduced and eventually eliminated.