Being debt-free is truly liberating. You're no longer burdened by repaying principal and interest. Credit card debt is a common trap people fall into. You spend money you don't have on hand, and using your credit card seems like an easy out. In reality, though, this can send you into a financial downward spiral.

Typical credit card limits are often 20 percent to 30 percent of your annual salary, but this isn't set in stone and can vary widely based on many factors. So, for someone earning ₱50,000 a month (₱600,000 annually), a credit card limit of ₱120,000 is likely reasonable. It wouldn't take much effort to max out that ₱120,000 limit. At a 3.0 percent monthly interest rate, your monthly interest payment would be ₱3,600. That might not seem like much, but it translates to a cost of ₱43,200, or 36.0 percent, a year! Reducing your disposable income by that much means you'll have to make do with less. Can you afford that?

It's easy to understand the advantages of avoiding debt, especially if it's for consumption. Of course, there can be valid reasons for borrowing money, such as buying your own home instead of renting, or investing in a business that earns more than the borrowing costs. Medical emergencies can also be a good reason for getting into debt. That said, the big question is: How do we avoid going into debt needlessly? The simplest answer is to live within your means.

If your earning capacity is limited, learn to spend no more than you earn and always set aside some savings for contingencies and a rainy day. Know how to prioritize your expenditures and differentiate between necessities and luxuries. Achieving a debt-free life isn't easy, especially at first, as you'll need to make sacrifices by reducing and downgrading your travel, entertainment, and leisure expenses. Your goal shouldn't stop at being debt-free, but rather at building enough savings to make investments that will earn for you in terms of interest, rental income, dividends, and capital gains.

The earlier you realize this and become debt-free, the better chance you have to save and invest more to build up your net worth and gain financial independence. It's much better to make those sacrifices and reduce your expenses when you're younger and have the luxury of time. Waiting until you're older will make it more difficult, as you'll have less time to work with, and your ability to adapt to a restricted and more austere lifestyle becomes harder as you age. For sure, making those changes to achieve a debt-free life is worth it!

(The views and comments of the author are his own and not of the newspaper or FINEX. Dr. George S. Chua was 2016 FINEX President, 2010 to 2020 FPI President, an active entrepreneur and a Professorial Lecturer 2 at the University of the Philippines Diliman and BGC, Vice Chairman of the Market Governance Board of the Philippine Dealing & Exchange Corp. and loves playing golf. Comments may be sent to [email protected] or [email protected])