In 2008, I got my first credit card and as the popular song by Aqua goes, “life in plastic is so fantastic”, having a credit card can make you lose your senses. You can buy anything! Worry about paying for it later. And so, it took only a few months until I realized that I had a hard time managing my credit card bills and ended up with a huge debt. I was in severe financial stress.
After almost a year of keeping it a secret and trying to pay off my bills, I finally sought the help of my friends. The strangest and surprisingly effective advice I got was from a friend who told me to read a chic lit called Confessions of a Shopaholic.
You see, there are valuable truths in this fiction. Two things actually- MMM and CBE. To get out of debt, the lead character had to either Make More Money (MMM) or Cut Back on Expenses (CBE). In my financial crisis at that time, I had to do both.
Cut Back on Expenses
In my experience, I had to evaluate my spending. Sometimes the culprit could be those small purchases. For example, buying a pair of socks for 199 pesos wouldn’t hurt your budget so much but if these pile up, then you would have a large bill to pay on your next cut-off. To resolve this, you must be conscious of your expenditures and hard as it may seem to follow, stick to your budget!
Make More Money
Making more money means you have to find ways to augment your income like selling your old clothes or exploring side jobs (or raket in Filipino slang) after your regular work hours. We make more money to either pay off our debt or add to our savings. Note: Making more money to increase our purchasing power should not be a priority. Some people would do a lot of rakets just to buy that new shoes or gadget. While it is good to reward ourselves with these things from time to time, too much will lead us to debt again.
Once you get out of chronic financial stress, you will gradually experience what is called financial peace. This is not an overnight thing and it’s a constant struggle to achieve on a daily basis.
Financial peace for me is basically living within your means and having extra money for other things. To get there, we must first do the debt snowball process. In a nutshell, it simply means liquidating or listing down all your debts and find an achievable or realistic schedule to pay off all of them. You take small steps until you can finally live debt-free. For some, it may take 3 months to pay off all their debts while others might take years. Just remember that the concept of MMM and CBE still apply in realizing your debt snowball.
Now that you know these concepts on personal financial management, here are 10 more aspects that you need to consider when managing your money:
Life is full of financial surprises, so it’s good to set aside a certain amount of money when the rainy days come–may it be job loss, medical emergency, sudden home repair or other personal troubles. An emergency fund is usually 3-months worth of your monthly salary (you can also increase it to 6 months). Tip: Open a separate bank account for your emergency fund so you will not be tempted to spend it. Out of sight, out of mind.
I grew up thinking that you apply for a loan so you can buy a new flat screen TV, a refrigerator, or that surround system that you always wanted. When I got a job, I learned that this is a terrible idea. The primary purpose of short-term loans is to invest in a business or to start one. Loan proceeds must be for a business venture so you have something to pay off your monthly installments. Tip: Make sure that you seek advice when you compare loans from different financial institutions. Also, be wary of hidden charges.
The remaining eight topics will be on the next blog post. Until then, happy spending- er happy saving. 🙂
Note: This topic is a condensed version of a talk I gave at the Young Professionals Group of Word of Hope Main.