Asian Journal- The Filipino-American Community Newspaper

If there is anything that we all should have learned from the debt and financial crisis of our country, it is that incurring debt should be avoided entirely if that is possible, but if it is not possible, then incur only the amount of debt that you have no difficulty paying off. In both cases, having too much debt that cannot be paid will eventually result in a financial hurricane that will wipe you out. What’s the other lesson that we learned from recent events? If you are big enough and important enough, Uncle Sam will come in and bail you out, and if there is no bailout for you, you will have to file for bankruptcy like Lehman Brothers.

The best is to have no debt. But not all debt is bad. First, examine why you need to borrow money. If you want to buy a house, it makes sense to get long-term debt at a fixed rate. It also makes sense to keep the debt as small as possible. Thus, if you have saved money, use that to make a downpayment on the house. A larger downpayment is better than a smaller downpayment. Second, determine if you can actually afford the mortgage payment. Your mortgage payment should not exceed 20 percent of your income. If it doesn’t exceed 20 percent of your income, you can afford to make the monthly mortgage payment. Thus, if your net income is $4,000, you can afford to pay $800 a month for mortgage on a house. This means that the amount of your mortgage will be about $100,000. So, if you make a net of $4000 a month, and you have $50,000 saved up for a downpayment, you can afford to buy a house that does not exceed $150,000. After applying your downpayment, you will obtain a mortgage of $100,000. The monthly mortgage on $100,000 is about $800. With your net income of $4,000, you can easily pay the $800 mortgage. Therefore, you can afford to buy the $150,000 house.

If you do not comply with these standards, don’t buy the house because you can’t afford it. Face the fact that you can’t afford to buy that house, and just rent an apartment. Save more money and buy a house later when you can afford to do so.

How about car loans? The best is to have no car loans or just to have a small car loan. For instance, if you desperately want to have a Lexus, settle for an older one, instead of buying a new one by taking on $40,000 of debt. You can buy an older Lexus for $10,000. If you have $5,000 saved up, use that for a downpayment and borrow $5,000 to buy the older Lexus. You will have a small car payment and a small car loan, instead of having a large car payment and a large car loan, and you will still have the pleasure of driving a Lexus without placing yourself in a financial bind later on. If you get a car loan of $40,000 to buy a new Lexus and return it later because you can’t afford to pay $750 a month, you will owe a ‘return deficiency’ of about $12,000. You will not have the Lexus but you will still owe $12,000. Yes, life is not fair.

How about credit cards? Stay away from credit cards completely. If you need a credit card to buy something that means you can’t afford it. If you can actually afford it, you would have paid cash for it. For instance, you want to have a 60-inch flat screen TV. The price is $3,000. You don’t have $3,000. Don’t use your credit card to buy it, unless you can pay off the entire amount next month. However, if the store has a no interest 2-years to pay deal, go for it. You can pay it off in two years without incurring any interest. With this deal, you can afford to incur the debt of $3,000.

If you need debt relief, contact my office. I will analyze your case personally.