The COVID-19 pandemic and the subsequent inflation have highlighted an essential truth: life is unpredictable, and no amount of planning can fully prepare us for the challenges it presents. For many Filipinos, unexpected medical expenses and loss of income forced them to rely on loans to survive. Now that the country is gradually recovering, it’s the perfect time to reassess your financial priorities and work toward becoming debt-free. After all, the future is uncertain, and facing another crisis without the burden of debt can make all the difference. Paying off your debts now not only gives you a fresh financial start but also allows you to rebuild your savings and safeguard your future.
Understanding the Difference Between Good Debt and Bad Debt
Debt, in any form, represents money that you owe and will need to repay. However, not all debts are created equal. Financial experts differentiate between “good debt” and “bad debt.”
Good debt is money borrowed to finance investments or purchases that provide long-term benefits. This could include loans for education, business, or real estate, all of which have the potential to improve your financial standing over time. For example, borrowing money for your child’s tuition is a good debt because it’s an investment in their future, potentially increasing their career opportunities and earning potential. Similarly, a personal loan to start or expand a small business could boost your income in the future, making the initial debt worthwhile.
On the other hand, bad debt involves borrowing to fund purchases that quickly lose value or have no long-term financial benefits. Credit card debt accumulated from impulse shopping or high-interest loans taken out to cover emergency expenses without a repayment plan are common examples. Bad debts typically arise from poor financial planning or spending habits, and they can quickly spiral out of control if not managed carefully.
While it’s difficult to avoid borrowing money during crises, especially when dealing with emergencies, it’s important to exercise caution. Repeatedly taking out loans, particularly when your income cannot comfortably cover repayments, can lead to a dangerous cycle of debt. Always consider your ability to repay before committing to any loan.
Should You Pay Off Debt, Save, or Invest?
One of the most common financial dilemmas people face is deciding whether to prioritize debt repayment, savings, or investment. All three are crucial to long-term financial health, but the right course of action often depends on your unique circumstances. Here are a few scenarios to help you decide:
Situation 1: Prioritize Paying High-Interest Debts
If you have a loan with a high interest rate, it’s often best to prioritize paying it off before focusing on savings or investments. For example, if you owe ₱5,000 with an interest rate of 10%, the monthly interest will cost you ₱500. In contrast, a savings account may only earn you a tiny fraction of that—about ₱1.25 at 0.025%. Clearly, paying off the debt will save you significantly more money in interest than you’ll gain by keeping the money in savings.
Situation 2: Save When You Have Fixed-Interest Debts
If your loan has a fixed interest rate, meaning the interest won’t change regardless of when you pay, you may want to prioritize saving. For instance, paying off a loan early may not reduce the total interest owed unless you pay the entire balance. In this case, putting money aside for emergencies or future financial goals might make more sense.
Situation 3: Invest When Potential Returns Are Greater
Investing can often yield higher returns than savings or debt repayments, particularly if the interest on your loan is low or manageable. If you have extra funds and don’t need immediate access to the money, investing in avenues like stocks, bonds, or small business ventures could significantly grow your wealth over time. However, always weigh the risks and potential returns before making investment decisions.
Bonus Tip: Don’t Forget to Build an Emergency Fund
While tackling your debts is essential, it’s equally important to maintain an emergency fund. Even a modest amount set aside can prevent you from falling back into debt in case of unexpected expenses. A solid emergency fund reduces your reliance on credit cards and high-interest loans during tough times.
Why You Should Start Paying Off Debts: 5 Benefits of a Debt-Free Life
No matter what kind of debt you have, paying it off as soon as possible can drastically improve your quality of life. Here are five key benefits of living debt-free:
✔️ Peace of Mind
Carrying debt can be emotionally draining. The constant stress of owing money, dodging calls from creditors, or feeling uncomfortable around friends and family from whom you’ve borrowed can take a toll on your mental health. Freeing yourself from debt lifts this burden and allows you to live with greater peace of mind.
✔️ The Ability to Plan for the Future
When you’re not weighed down by debt, you can focus on achieving your long-term goals. Whether you dream of buying a home, investing in property, or simply saving for a comfortable retirement, having no debts allows you to allocate more of your resources toward these aspirations.
✔️ Freedom to Build an Emergency Fund
Once you’re no longer obligated to make debt repayments, you can redirect your income to build a solid financial safety net. An emergency fund gives you a cushion to fall back on in tough times, ensuring that you don’t have to rely on credit during a financial crisis.
✔️ Opportunities to Own Assets
Debt can limit your ability to accumulate wealth through assets like real estate, stocks, or a new car. By becoming debt-free, you can save for the purchases that matter most and invest in items that can provide long-term value.
✔️ Improved Credit Score
A clean financial slate positively impacts your credit score. With a higher credit rating, you’ll have more opportunities to take out future loans with better terms, making large purchases like homes or vehicles easier to finance.
Steps to Achieve a Debt-Free Lifestyle
Becoming debt-free requires commitment and a solid plan. Here are a few steps to get started:
👉 List All Your Debts
Make a comprehensive list of every debt you owe, including the interest rates and due dates. Start by adjusting your budget and focusing on paying off the largest or highest-interest debts first. This strategy will help prevent your debt from growing over time.
👉 Consider Balance Transfers or Debt Consolidation
Debt consolidation can be a useful tool for managing multiple debts. Some credit cards offer balance transfers with 0% interest for a limited time, allowing you to pay off your debts faster. Alternatively, consolidating your loans into one account with a lower interest rate can simplify your repayment process.
👉 Explore Additional Income Streams
Finding ways to supplement your income can accelerate your debt repayment efforts. The internet offers various opportunities for online gigs, from freelance writing to virtual assistance. Even small side jobs can make a big difference in paying off your debt faster.
👉 Live Within Your Means
It might sound simple, but living within your means is crucial to staying debt-free. Avoid unnecessary spending and focus on sticking to a budget that allows you to cover your essentials while saving for the future.
Final Thoughts
Becoming debt-free is a journey that requires discipline, patience, and smart financial planning. While it’s not always easy, the rewards of living without debt are undeniable: financial freedom, peace of mind, and the ability to pursue your dreams with confidence. By taking control of your finances and making consistent efforts to repay your debts, you can secure a better future for yourself and your loved ones.
