Saturday, September 24, 2011

The Reason Why we Get Into Unwanted Debt

The Good Book says: "Do not wear yourself out to get rich; have the wisdom to show restraint." Proverbs 23:4.

Well, this is King Solomon, the wisest and wealthiest king that ever lived, telling about his experience when it comes to getting rich.

I realized, in my own life, that I have been trying to get rich. I've focused on trying to get rich. That's not bad isn't it. Everyone wants to get rich. So why am I telling you this?

I got into big debt trying to get rich.

The Plan
One day, a friend visited us in our office. She came with the sales representative of a big real estate company selling condo units. I was called by my partner to that meeting. The sales pitch was this: buy a unit which cost about P1.9M, pay the reservation fee of P20K, then pay the 10% downpayment in 18 months just in time for the building to be finished, thereafter, pay the balance.

The plan was to have the unit rented and use the money to pay the monthly amortization. So it's self liquidating. A passive income in the making. Any investor can see that.

The Dotted line
So I signed on the dotted line. The only problem was, the money I was expecting, an increase in my salary didn't come. So, I had to borrow to pay for my monthly downpayment. I got over that in 18 months on borrowed money.

Here comes the balance. I applied for a loan, I was only given 70% of the amount I need to pay the balance. My world crumbled. I had to give up the unit and forfeit any money I paid. I had no choice.

Fortunately, my sister got interested in the unit and paid it cash. But I had to pay interest charges and the penalties that came due to delays in the payment of the balance. It was in the contract, only I didn't read it. They are in small letters.

Today, I am still paying for the penalties.

Two lessons I learned:
1. Don't be presumptuous. Study the offer and know your financial capability. I wasn't ready. I was day dreaming and wishing my increase will come to take care of the downpayment. It didn't. My income can't sustain the monthly payments of the condo unit.

2. Learn from lesson number 1.

To your debt-free life,

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