Ways To Be Debt Free: More On Emergency Fund

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source: http://www.prouddoctors.com

I have posted topics about emergency fund and I would like to add some points in regards to it.

If you remember in my post 7 Rules of Stock Investing, setting up an emergency fund is rule no.5. Now besides having an extra cash for personal use and bargain buying,  one has to have emergency funds for the unexpected or unplanned events or expenses in life.

Now how does this relate on achieving debt-free status?

Well often times most people borrow money due to emergencies.

It could be a SSS Loan to cover an unexpected operation or hospitalization. A credit card loan for a plane ticket on an unexpected family emergency or "utang" to your office mate for your son or daughter's unexpected school outing. Yes you incur debts out of thin air just like magicians, payables just come out just like that.

These are the very reasons why you go from break even to broke. 

You were doing fine or okay balancing and budgeting your paycheck to paycheck and on the way of finally scrapping "savings" but as the famous commercial of the insurance company Allstate in the USA, MAYHEM just comes into the picture.

Your Emergency fund actually acts like your insurance only that this one is your very own. This fund should not be touch for your "wants" emergencies. You should not get money from this fund if you wanted to buy a flat screen TV when there is a 50% sale in SM Appliance Store. Yes it may be a bargain but it is not an emergency.

You must clearly define an emergency in order to pull out money from your emergency fund. Also you should be consistently putting in money to your emergency fund, not only when you have leftover after allocating your funds. No matter how small you put into this fund surely when the need comes it will help a lot.

So in line with your debt-free goal, make it a habit to allocate to your emergency fund.   

Bible Quote of the Day: Proverbs 22:7

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The rich rules over the poor, and the borrower is the slave of the lender. Proverbs 22:7

It seems absurd that the Bible has such verse. Many would take the first phrase in a bad way because that is what it looks like what is happening that is the rich taking advantage of the poor. 

Such is an analogy to explain the second phrase which says that the borrower is the slave of the lender. This is very true. If you are in need and you resorted to borrowing it is only logical that the borrower will submit to the terms of the lender thus the Bible renders such warning.

If such things can wait or if it is not a matter of life and death I would suggest that don't resort to borrowing.   If your need for cash is only to enjoy a vacation in Boracay or probably a day shopping in Hong Kong please only go there when you have free cash and not be borrowing. You may have enjoyed it but I assure you it is only enjoyable until your lender asks you to pay up.

The really good thing is for you to be the lender that is turning the table around but it would be more enjoyable if you lend to help others get out of debt by teaching them financial literacy.

Ways to be debt free: How to get out of debt fast

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source: http://harmonizingstatements.com

The fastest way to get out of debt is get a loan on another bank and pay your loan on the other bank or lending institution.

Just kidding! Actually that is the fastest way to be buried in debt and that is one of the sign of one's credit addiction.

source:http://www.ehow.com

So how does one get out of debt fast? Its a question worth a billion dollars. There are so many ways but here is what I know, read and learned.

There are two components to get out of debt fast:

One is to pay the debt with the onerous terms first.

Second is pay more on the onerous debt that will take lesser number of payments to zero out.

So simple right? Lets take it one of the time.

What is "ONEROUS"?

source: http://ravenesquetarot.com

Onerous as define by Cambridge Dictionaries Online is "difficult to do or needing a lot of effort" in other words "burdensome". A debt or loan is burdensome if it charges a higher interest. So for example 

a credit card debt which charges an interest of 1.5% per month is onerous than a loan in a bank that charges 8%. Why is that so? Do remember that the word "interest" in the banking system signify a rate that is for a year thus the terminology "per annum" which is Latin for "per year or annually".

Thus the actual rate on the credit card is 18% per annum. Why do credit card companies state there rate per month? Because it is more attractive than stating it per annum, now you know. 

But the onerous classification should not end in the interest rate. What if you owe only 10,000 pesos in your credit card but you owe 500,000 in your bank loan? See the big difference if you calculate the actual interest. The point of paying debt that are more onerous than the rest is to avoid paying more interest.

Now why do we have to pay more on an onerous debt with a lesser number of payments first? Again the purpose of this is to avoid interest. 

If you pay a debt with a onerous debt with a lesser number of payments more you are actually shortening the number of payments. When a debt requires a lesser number of payments it means you are paying bigger amount per period on such debt. 


When you pay more on such debt or loan the principal where interest is base on becomes smaller each time payment is made thus the interest you will pay will shrink as you pay it. When the principal shrinks in that manner it means your debt balance is dwindling faster and it is there that you save on interest and quickly pay your debt.

If you noticed Debt 2 which originally needs a payment of 2,000 pesos for 25 installments will be fully paid in only 9 installments while Debt 3 which originally needs 33 installments of 3,000 pesos is now fully paid in 16 installments. 


That is what you call getting out of debt fast.

Link to check out: http://s3.amazonaws.com/TracePDF/ThinkRichYuppiesFreeChapter.pdf

Investing word of the day: Liquidity Ratio

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What is Liquidity ratio and why is it important?

source: http://www.myjourneytomillions.com

Investopedia defines Liquidity ratios as:

A class of financial metrics that is used to determine a company's ability to pay off its short-terms debts obligations. Generally, the higher the value of the ratio, the larger the margin of safety that the company possesses to cover short-term debts.  

Liquidity ratio is a metric or an indicator where one can see or gauge a company's ability to pay short term debts. It enables one to determine if the company can pay off maturing debts that supports its operations. Short term debts are incurred to fund current operations thus if the capability of a company to pay such is impaired, the company might have to stop its operation causing a delay in operation thus affecting its earnings.

 Liquidity Ratios include the following:

1. Current Ratio - is derived by dividing current assets by current 

                            liability. A number higher than one is a good 

                            current ratio.

2. Quick Ratio - also known as acid test ratio is a                            

                           stricter/conservative way of determining liquidity

                          by taking out inventory in the current asset amount. 

3. Operating Cashflow ratio - is derived by dividing cashflow from 

                        operations by current liabilities.

With these ratios we can now determine if a company is liquid enough to pay off its outstanding or due debt. Determining if a company is liquid enables us to project if the company will continually generate earnings since it has enough fund to support its day to day operation without need of additional capital from investors or lenders. 

It is a sign that a company manages its finances well by having enough liquid funds to avoid interest expense.

On the contrary there is a thinking that if a company has a good earnings and have a current ratio below one then it is able to leverage. This means that the company is earning on borrowed money. As long as it is able to meet its debt obligation on time without incurring additional finance cost then that is okay. 

Investing word of the day: Leverage

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 source: http://www.etftrends.com

Hi it's been quite awhile since I posted some investing words to think about.

So lets start with LEVERAGE.

Investopedia.com defines leverage as :

1. The use of various financial instruments or borrowed capital, such

    as margin, to increase the potential return of an investment.

2. The amount of debt used to finance a firm's assets. A firm with

    significantly more debt than equity is considered to be highly 

    leveraged.

Leverage is most commonly used in real estate transactions through the use of mortgages to purchase a home. 

So basically what does this word mean to us? 

Well leverage is taking advantage of available means to increase profit. To make it simple let's use OPM(Other People's Money). 

For example since Christmas season is around let say you wanted to sell those beautiful parols but right now you don't have enough capital to buy such. So you decided to find the manufacturer to make sure you get it at the cheapest price. So you went to Pampanga and was able to find the manufacturer. 

But even though its cheap at the manufacturer you still don't have enough capital of your own so you ask your brothers and sisters to lend you money. And so you got the money and got the parols. Displayed the parols in your house which is along the busiest road in your subdivision and by week's end you sold all the parols.

So where is leverage there? That is where OPM(Other People's Money) come. Well you were able to make profit even without you shelling out cash to finance your purchase.

By that you were able to increase you earnings by 100% if you fully financed it with borrowed money.


The same principle is used in Larry Gamboa's book Think Rich Pinoy(an adaptation to Robert Kiyosaki's principles in the Philippine setting).

                            source:http://thinkrichpinoy.com

source: http://fireballbooks.com/ThinkRichPinoy/

Larry and his partners scout banks for foreclosed properties that are auctioned at insanely low price. With a required deposit of only Php 25,000.00( this is the minimum I think) they were able to join the auction of foreclosed properties and the bank will even let you pay the property at installment basis.

So Larry Gamboa and company are able to leverage on their buy and sell project because it seems that they didn't even empty their pockets to fund the project because they borrowed the fund they need to the same bank who  sold the property. 

That is what we call leverage or in our Pinoy lingo OPM ;)   or better yet DOING MORE WITH LESS

source: http://www.healthy-holistic-living.com

Ways to be debt free: What now?

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                                                       source: http://7million7years.com

Its been awhile since I wrote something about this topic. If you haven't read the first part click here.

In my last post we talked about accepting that you are in fact buried in debt. It may sound crazy or something but as any other form of addiction acknowledging your situation is the very first step. Now the next thing one should do is to make an inventory of whatever one has. 

When I say "whatever one has" that includes your assets and your liabilities.

Do you have a car? Do you have a house or a laptop? These things are your assets. Assets are things of value that you own. 

Do you have a credit card loan, a bank loan, a mortgage, or a "utang sa 5/6" ? These things are liabilities. Liabilities are things that you owe.

List these things separately. You could have a notebook with the pages equally divided of which the first half would be your ASSETS and the second your LIABILITIES. Make it a four column page. The first would be your description or name of the asset or liability, the second is the amount related to it, the third is your plan for it, ans the last is where you can either put a tick mark to indicate if the plan for it is done or a date of which you want to achieve such. See  sample below:

Now just like the above examples you have to decide which assets of yours can go away and which one are necessity. I know this would be gory but hey remember you are buried in debt and if you don't get out of it fast the more you will be buried in the pit. Oh these is one of the secrets ... you must get out of debt fast.

On your liability section determined which one are onerous or burdensome.

Lets define onerous, courtesy of wiktionary.org

Etymology

From Latin onerosus (“burdensome”), from onus (“load”).
Pronunciation

    * (UK) IPA: /ˈəʊn.ɜː(ɹ).ʌs/ SAMPA: /"@Un.3:(r).Vs/

Adjective

onerous (comparative more onerous, superlative most onerous)

   1. burdensome; difficult; wearing; tiring

Antonyms

    * gratuitous

Related terms

    * exonerate
    * exoneration
    * onus

Why list liability in the order of burdensomeness? 

As I have said awhile ago the faster you pay your debt the better. So the faster you pay debts or loans with hefty interest the better because you save money paying the interest attached to it. So looking back at the above I guess the Php 650,000.00 bank loan at 15% per annum should be settled or paid first to avoid paying interest.

Now looking at your assets, list them down in the order of greater fair value. Sorry I never told you. Maybe your laptop cost 25,000.00 when you bought it 3 months ago but if you are to sell it  now probably you will only get 10,000.00 to 15,000.00. One has to consider an asset's fair value. 

Wikipedia has this to say about fair value:

A rational and unbiased estimate of the potential market price of a good, service, or asset, taking into account such objective factors as:

    * acquisition/production/distribution costs, replacement
      costs, or costs of close substitutes
    * actual utility at a given level of development of social
      productive capability
    * supply vs. demand

and subjective factors such as

    * risk characteristics
    * cost of and return on capital
    * individually perceived utility

What does this mean? Your assets may have a lower or higher value depending on how much is the accepted fair value at the time of sale. So what can you do to be able to sell your stuff to pay off your debts? I guess these are my only advice in regards to this matter ; first make sure people who are interested to buy see value in your asset and second make sure such are in good shape.

Looking at the two sides you might notice that you have a difference of negative Php 197,500.00

This is what we call Net Worth. To read about my post regarding Net Worth click here.

Having a negative net worth signifies that you are really buried in debt while having a break even or a positive net worth means you are able to leverage your assets and liability to the full potential. 

So what is one of the things that you should do to be debt free? 

You have to list your asset in the order of greater fair value and liabilities in the order of onerousness. Pay first your onerous debts and make sure your assets has greater value so that you can get as much from it.