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SavingsPinay Series | Day 1: Gaano Kalaki Ang Utang Mo? (Evaluating Your Debt)

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The SavingsPinay Series | Ayoko sa Utang! 5 Days To Be Debt-Free For Life is created and published first in this blog. Visit this LINK for the past SavingsPinay Series.


Day 1: Gaano Kalaki Ang Utang Mo? (Evaluating Your Debt)


I am fortunate to be blessed with parents who worked hard to sustain our lifestyle. We never experienced na mangutang sa tindahan at mag-promisory note para makabayad ng tuition.

We are not rich but my parents inculcate the best financial habits on us. To start with, I don't have any utang. And I don't plan to be in debt. As young as today, my goal is to set myself to financial freedom and prepare the steps to the right path.

However, me and my siblings are all aware that our parents had suffered a lot to be meet both ends. There was a time na kailangan mamasukan ni Mama bilang labandera sa aking Tita (Remember Nanay Tessie from Goodbye September, Hello October post?) I know they became in big debt to pay for our daily needs. 

But you guess what?! Hindi kailan pinadama nila Mama at Papa na nahihirapan sila financially. We were able to survive. We hustled and enjoyed the victory afterwards.

With that being said, I believe what I'll be saying for the next five days are taken from my parents' account, from research and from financial posts and books I have read for the past years. 

Gaano Kalaki Ang Utang Mo?

Kapag tinanong ka ng ganiyan nang kaibigan mo, anung sagot mo? Maybe you will feel stunned. Baka nga ma-asar ka pa. We don't want to be asked about our debt. We don't even want to remember na may utang pala tayo.

I remember the joke that I once stumbled in my newsfeed. It says:


Today I want you to remember how much debt you really owe. 

From the smallest to the largest amount. 
All bills that you have to pay and all names of persons whom you need to repay. 



Evaluating Your Debt

There are two kinds of debt in this world. We have what we call "good debt" and "bad debt". 
Good debts are considered low interest debt. Utang na maliit or walang interes kapag binayaran mo na. I believe I had said a primer about this on my post All About Five-Six a year ago.

Bad debts are the dangerous kind. They have high interest rates that can be fatal to your budget. 

To further differentiate a good debt from a bad debt take a look at a credit card loan and a salary loan.

Both are considered debt as you owe money. But the credit card will have a higher interest rate than a salary loan. Also, the credit card most often than not was used to pay for a want (maybe a new phone, a new appliance at home) while the salary loan must have been taken to pay for a crucial money problem (medical issue, sudden death of a family member). 



How about your utang? Are they good debt or bad debt?

Now that you know the difference between a good debt and a bad debt the next step will be very crucial. 
Writing It All Down

What I want you to do is grab a pen and a paper and writer down all the person, company or bill that you owe money to.

Think of everyone and everything from your in-laws, the credit card that you maxed out, Meralco and Five-Six. From good debt to bad debt, from smallest to largest just jot everything on a sheet of paper.

Once done, total the amount. Be sure to also get how much your utang is on a monthly basis.

You may be shocked, afraid, stressed out with the total but don't panic. Knowing your total debt is the very first step to become debt-free soon.

Because you know how much money you really own you can now develop a solid strategy. You can develop a plan that guarantees you can repay your debt . 

Before you build an emergency fund, before you make a budget, before you set any goals... Evaluate first how much your debt is.
Debt-to-Income Ratio

Now that you pretty much have the sum of all your utang you can now formulate a method on how to pay. And a good way to strategically place your money to repay your current debt is to know Debt-to-Income Ratio. 

Definition

Debt-to-Income is a one way is one way lenders (including mortgage lenders) measure an individual’s ability to manage monthly payment and repay debts. Now you can use this too to assess on a personal level your capacity to pay your total debt based on the total income you have at the moment.
Knowing Debt-to-Income Ratio will let you know whether you can really pay off your debt sa pera na kinikita mo ngayon. It will help you assess if your level of debt is really manageable.

The Formula

Notes:

  • Total Debt and Total Income is on a monthly basis.
  • Differentiate the Debt from the Bill. We are talking about debt here and not the monthly bills like electricity, rent etc.
Example:

Juan's total monthly income is 12,000pesos (This is his take home pay from his day job)
His monthly debt is 4,000pesos (Monthly credit card payment, housing loan etc.)

Total Debt/Total Income = Debt-to-Income Ratio
4,000/12,000 = 0.33 or 33%

The Meaning

A low debt-to-income ratio shows a good balance between debt and income. Financial advisers suggests a good 10-20% as Debt-to-Income Ratio.

A higher debt-to-income on the other hand suggests that a person has too much debt for his income. This can cause financial loop hole in the long run.

Looking at Juan's Debt-to-Income Ratio as an example means that 33% of Juan's salary just goes to pay off debt. This percent is alarming because it it is almost 50% of what Juan is getting on a monthly basis.

The Solution


If ever you got a higher Debt-to-Income Ration there are only two solution you can choose from.


Wag Ka Mo Nang Dagdagan ang Iyong Utang (Don't add anymore in your current debt)


Taasan Mo Ang Iyong Kita (Increase Your Monthly Income)

 It is better to apply both solution if you want to get out of debt fast.

Again with Juan's situation, if ever his monthly total income increase his Debt-to-Income Ratio will surely become lower. 

READ:


Now What?
Now I encourage you to do the following:
1. Spend a good 10-15 minutes to write down your debt.
2. Evaluate between your good debt and bad debt.
3. Total the amount.
4. Now get your Debt-to-Income Ratio using the magic formula. Make sure you are on a monthly basis.
5. Assess the result. Do you have Low Debt-to-Income Ratio or High Debt-to-Income Ratio?
6. Choose a Solution.  

If you did the steps above can you share it to me? Comment below and find accountability partners from other SavingsPinay Readers. You can also go to the SavingsPinay Facebook Group and join others who share their saving, budget, investment, productivity, career and other financial problems, questions and issues.

Tomorrow I will give you 25 Ways To Pay Off Your Debt so be sure to comeback to this blog. '

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