MIDTERM

Lesson 4:

MANAGING DEBTS
EFFECTIVELY

Attention: GROUP 4, you are our next reporters (next week)

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BUILD A STRONG FINANCIAL FOUNDATION

Investment

Emergency Fund

Paid-Off Debts

Life Insurance
(Term / Pure)

Healthcare
(Short-Term Healthcare & Long-Term Healthcare)

Positive Cash Flow

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 LS03 – Lessons for Wk. 6
1. To understand the concept of debt.
2. Learn the different types of debts.
3. Realize why we need to manage debts effectively.
4. Be fully aware of the implications of mismanaged
debts.
5. Understand the different ways to manage debts
effectively.

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 Managing debts effectively
In the Philippines,
many companies
make it so easy &
convenient for
people to borrow
money.

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 Managing debts effectively
When you go to the
malls, you can see
promos stating:
“Zero Interest
installment rates
using your credit
card!”

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 Managing debts effectively
“Buy now, pay later!”

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 Managing debts effectively
When you go to car dealers, they also make it
very easy to “buy” a brand new car, by making
the down payment very low.

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 Managing debts effectively
You can get a brand new car with only a
P50,000 down payment. Then, they let
your car loan take care of the difference.

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 Managing debts effectively
Always remember that all debts need to
be paid with interest, as what J.Reuben
Clark said,
“Once in debt, interest is your companion
every minute of the day & night, you
cannot slip away from it; you cannot
dismiss it; it yields neither to demands or
orders; and whenever you get in its way or
fail to meet its demand, debt crushes you.”
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 Good Debt vs BAD Debt

Do you have debts?

Is debt good or bad?
Should you or your family
get into debts?
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 Good Debt vs BAD Debt
Good News! Not all debts are bad.
There’s what we call Good Debt and
there’s Bad Debt.

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 Good Debt vs BAD Debt

Bad Debts are credit

card debts or loans
that have no potential
return on your money.

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 Good Debt vs BAD Debt
Example of Bad Debts

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 Examples of BAD Debt
Borrowed money to finance high-end
gadgets for personal use.

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 Examples of BAD Debt
Borrowed money to finance a vacation
or travel.

#Outang
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 Good Debt vs BAD Debt

Good Debts are those

that have a potential
return on your money.

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 Good Debt vs BAD Debt
Example of Good Debts

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 Examples of GOOD Debt
Borrowed money
to finance a
business venture

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Examples of GOOD Debt
Borrowed
money to
finance a
child’s
education

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 Debt interest rates
Two (2) Main Types of Debt Interest Rates:

1. Add-on: Interest rate is based on the

original debt amount. You pay the same
amount of interest, even if you already paid up
part of the principal.

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 Debt interest rates
2. Diminishing: Interest rate is computed
against the loan balance.

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Why should we manage debts?
Debt can turn into a disease. It could
control your life, diminish your happiness,
and limit your freedom.

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Why should we manage debts?
Getting out of debt may be one of the hardest
things to do. It takes a lot of effort & time. But
you must persevere. You can never be truly free,
until you are debt free.

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 Do not get into more debtS
Live below your means! Don’t spend
more than you make.

Let say you are saving money, and you

get a 1% annual rate of return.
However, you have a credit card debt
that you don’t pay in full every month.
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 Do not get into more debtS
Even if you save at the rate
of 1% annually, if your
debts have an interest of
42% annually, you are
draining money at a much
faster rate. You are losing
at the rate of 41%
annually.

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 Types of debts
1. Credit Card Cash Loans
A loan that allows the
cardholder to avail of a
portion of his total credit
limit in cash

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 Types of debts
2. Credit Card
Cards issued by a bank, business, etc. allowing
the holder to purchase goods or services on
credit.

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 Types of debts
3. Personal Loan
A loan that establishes consumer credit, and
granted for personal use.

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 Types of debts
4. Car Loan
A loan used for purchasing a new or a used car
vehicle.

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 Types of debts
5. Housing Loan
A loan advanced to a person to assist in buying a
house or condominium.

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 Types of debts
6. Business Loan
A loan specifically intended for business
purposes.

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Understanding fees & charges
Another killer most people don’t know is that, aside
from higher interest rates, lending companies also
charge Other Fees like appraisal fees, insurance,
transaction fees, annual fees, late charges, finance
charges, etc.

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Understanding fees & charges
For Loans that do not require collateral, the
lender charges a much higher interest rate to
offset the risk it is taking (in lending the money).
For Loans that require collateral, interest
rate is lower.

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Understanding fees & charges
Today, even well-educated, hard-working,
good earning people fall into heavy debt!

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 Tips to manage your debts
Control your debt or
debt will control you.
Getting out of debt
may be challenging,
but with enough
Discipline, you & your
family can be Free
from Debts!
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 Tips to manage your debts
1. Pay off your credit card debts in full and on
time so that you don’t have to incur charges.
The interest rate in a typical credit card is around
3.5% a month or 42% a year. Even if you are
saving or investing at the rate of 10% a year, if you
have credit card debts, you’ll drain money at a
much faster rate.
Most credit cards have 22 days as “Grace
Period”. They do not charge interest if you Pay
in Full, within the grace period.
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 Tips to manage your debts
2. Don’t get into more debt. Live below your
means. Do not spend more than you make.

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 Tips to manage your debts
3. Use cash or debit cards. If you have 5 credit
cards, cut up the other cards and retain only 1 or 2
cards, which you will use for convenience
purposes only.

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 Tips to manage your debts
4. Spend on necessities, not luxuries. Buy
only what is necessary like food, healthcare & life
insurance, and utilities. Cut out unnecessary
expenses like cable TV and high-end gadgets.
Change the habit of spending to habit of saving.

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 Tips to manage your debts
5. Make a list of all your
debts, and pay them off
one at a time. Pick the
easy, low-balance high
interest debt first and
eliminate it.

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 Tips to manage your debts
6. Increase your Cash Flow to fast track debt
payment. Change the habit of borrowing to the
habit of increasing cash flow.

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 Tips to manage your debts
7. Consider liquidating your savings &
non-income producing assets. Withdrawing
your savings to pay your high interest debt can
be a very timely decision.

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 Tips to manage your debts
8. Change your Money Mindset. Debt is not a
solution but an obstruction. You can never get
out of debt if you continue to believe that debt
will solve your money problems.

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 Tips to manage your debts
9. Prepay your mortgage.

When you get bonuses,

instead of spending it on
luxury or unnecessary
things, use the extra cash to
prepay your mortgage.
You’ll get out of debt sooner
and live a worry-free life.

*http://www.bankrate.com/calculators/mortgages/mortgage-calculator.aspx 46
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Temporary File
 Debt interest rates
Example:
Sharon buys a new car for P700,000. She
trades-in her old car, and uses the P200,000 she
receives as down payment.
a. How much needs to be financed?
b. The dealer says the interest rate is 9% Add-on,
for 3 years. Find the total interest.
c. What is the total amount to be repaid?
d. Find the monthly payment.
e. What is the total cost?