This is the kind of tip you can’t find through Google and you can’t read on MarketWatch and CNN.
Paying off debt is always a good idea, but you have to be smart in doing it. If you are caught between the devil (say, resorting to one meal a day) and paying off debt completely, there has to be a place somewhere in between that will allow you to breathe easier and yet escape a pauper’s life.
One way is to do credit substitution. That simply means retire your debt with the highest interest rate by borrowing with a lower interest rate.
A simple solution for getting out of debt is to get a salary loan from the Social Security System (SSS), Government Service Insurance System (GSIS) or from your company to pay off your high-interest bearing debt.
I am very surprised how many SSS members and GSIS members do not know their benefits. A salary loan from the SSS is supposed to help members with financial emergencies. The nominal interest rate is 10 percent per annum, the maximun amount loanable is P30,000.
Nominal interest rate on loans means the interest rate has not been adjusted for the full effect of compounding. Unfortunately, we have yet to know the frequency of compounding used by the SSS so I cannot give you the effective interest rate. However, I am pretty sure the effective interest rate will be higher than 10 percent but definitely much lower than the 42 percent credit card companies are charging.
For government employees, GSIS’ salary loans have an eight percent to 12 percent interest rates. Maximum loanable amount is up to eight months of basic salary.
Here’s another side benefit from tapping your SSS and GSIS benefits: some discover that their employers have failed to remit SSS contributions only after they applied for a loan. These cases have been increasing and they are shameless and dangerous. Spotting the problem early can save you some amount of money.
Another way would be to talk to your Human Resource Department to know if your company has any special benefits for employees burdened by financial emergencies. Take advantage of these benefits because they charge below-the-market rates.
Simpler and more effective, of course, would be to get an interest-free loan from your mother, father or siblings. But if you go this route, be responsible and pay some interest. And do honor your loan, please. It is just too tempting to ask mom to write it off.
Now, before you fill up that salary loan application form, know that having that P30,000 check in your hand will be very, very tempting. Do not use it for other purposes, or else you will end up with having to retire two loans instead of one.
What is the relationship between paying debt smartly and turbo-charging your savings? Interest on loans is one of the biggest holes in your savings net. It can eat up any returns you may be getting from savings and investments. For personal finance enthusiasts, interest on debt is the face of the enemy.
June 7th, 2007 at 6:12 pm
[...] Money Smarts: Turbo-charging your savings tip#2: Don’t just pay off debt. Pay it smartly [...]
June 7th, 2007 at 3:50 pm
I agree with Salve, as a matter of fact, ginawa ko yan recently. Big relief! It was my first time to apply for a loan with SSS and OK naman with regards to the process. I was able to “refinance” my financial obligations kaya ngayon nakahinga na ako ng malalim.
As I applied for my SSS loan, the SSS officer who processed my papers told me it was a good thing I filed for a loan. Kasi daw, some SSS gnomes have this nasty habit daw of moving funds of SSS members who have “dormant” accounts, i.e. bigay lang ng bigay ng contributions and no loans, benefits applied for. “Ginagalaw” daw, pinapahiram sa iba na kakilala, and binabalik before the member applies for something. Kaya daw it’s a good thing to “disturb” your SSS once in a while. May cases na daw ng mga members na first time na mag loan, only to find out na “patay” na sila sa records at may nag-claim na ng benefits.
Of course, on top of everything else, let’s be responsible with our finances.
One more thing, may kaibigan ako who “defaulted” on his HSBC credit card…napadalhan sya ng demand letter pero he was able to pay it back. kaso, ang bagal daw magbigay ng clearance ng HSBC…seven months na ang nagdaan and yet di pa nya natanggap ang clearance nya.. as a result, he can’t open a bank account with BPI … ang sabi naman ng CIBI, they can’t clear his name kung hindi mauna ang HSBC..
June 7th, 2007 at 2:32 pm
in our company we have our so-called “Hulugan Funds” (not company sponsored) where an employee can be a member of and can avail of up to n shares (theoretically). One share is equivalent to Php 500/payday and this money is pooled and lent out. Members get 3.5% interest monthly, non-members get 5%.
Last year with one share and Php 10k total in contributions, each member was able to earn Php 1700+ change. Not bad for something a resourceful person started 2 years ago (said person was not me).
This year, judging by the trend, each member can probably get 2k each + original contribution amount.
June 7th, 2007 at 1:58 pm
because of this entry i called up our HR to hand me the forms for an SSS loan to pay for my credit card bills! hehehe. keep it up
June 7th, 2007 at 1:52 pm
one way to use the power of interest to your advantage… try this.
i loaned from banks and charged me 1.75% / month. thats coming around to 21% / year on simple interest.
but more if you’re to compound it.
but here is the beauty of it. i lend the loaned money on what you call 5-6, but mine is not really of such.. coz i charged only 5% interest/mo payable in 2 months at the most.
here i can compound the money and let the interest gain interests as well.
simple math will tell you that you’ll win in the long run…
i think they call this “carry-over trade” business. and you may also call this leveraging since your using banks money to work in your behalf.
prudence on cash flow management is an essential trait here.. plus some appetite for risks as well. but as they say, it’s only risky if you don’t know what your doing. ignorance is riskier!!
why don’t you try also??