Thursday, September 29, 2016

Sunlife: an afternoon with Mr. Aya Laraya on the importance of managing money and debt

Once again, Sunlife Philippines Inc. extended an invitation to attend a talk on money management, hosted by Mr. Aya Laraya, an investment and finance guru. The topic for the afternoon was about debt and the proper attitude toward it. I'm not usually beholden to crippling amounts of debt.  Nevertheless, I took the talk as an opportunity to learn that debt can be used as an instrument to increase one's financial standing and potential.

Debt simply means: the use of other people's money, usually for a fee. However, not all debt is supposed to be considered bad or given a negative connotation. There are good ones such as business receivables, credit, and collateral which are usually used in the ordinary course of business. Furthermore,  equity investment such as IPO's and partnership shares can be used to generate working capital for the operation of an enterprise. Thirdly, there are also investment instruments such as bonds, stocks, and deposit substitutes which are intangible investment instruments for the purpose of generating wealth.

While good debt is taken advantage of to boost income, there are also forms of debt that can debilitate productivity. These are in the forms of bad debt. Bad debt is generally used to finance consumer spending and short term gratification such as luxury items and non-essentials.

According to Mr. Laraya, a good informal rule for controlling the amount you borrow is to use a month's salary. Furthermore, you can also tell your credit card provider to decrease the credit limit in order to curb the temptation to spend more. Lastly, using the debt to fund more productive ventures is a better way to reconsider consumer spending.

 I also learned about good informal rules in gauging loan amounts. In business loans, a good rule to follow is to borrow not more than 50% of owner's equity. While in housing, having 35% of income amortization is the limit for monthly payments.

Also, there are 3 ideas which can be used to ask whether a person should enter into debt. One is measuring how much one owns. The second is the size of the debt; and the third is how much a person can pay.

Lastly, in order to gain freedom from debt, a person must do three things:
1.Eliminate the credit card as a means of quick cash.
2. Create a payment plan in negotiating debt.
3. Switch to more efficient means of living.

Debt is truly a powerful thing, whether for its good or bad aspects. Albert Einstein truly nailed the concept of debt when he said that the most powerful force in the world is compound interest.

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