It is bad enough not to have any savings, but to be in consumer debt is much worse. What is consumer debt? It is when you borrow money for personal, family, or household consumption—such as eating out, shopping, auto and appliance loans, holidays, travel, vacation, entertainment, and all kinds of expenses not related to an investment that provides some form of return or capital appreciation.

Nothing comes free. When you buy something using your credit card or a consumer loan, you not only have to pay back the principal, but you also pay an additional amount of interest that is much higher than what you could hope to earn from any savings account, time deposit, money market, corporate bond, or government treasury.

Of course, there are situations where it might make sense to borrow money, such as starting a business or buying real estate and other asset classes that provide revenue, capital appreciation, or both. As an example, suppose you have an opportunity to buy a residential property for ₱30 million. If you could rent that property out for a net amount of ₱100,000 a month, would you do it?

It might make sense to make the acquisition and rent it out if you already had that ₱30 million in a time deposit earning a net rate of three percent per annum, or ₱75,000 a month. This switch would give you ₱25,000 more per month, plus a potential capital gain when property prices appreciate. On the other hand, if you only had ₱15 million in your time deposit and had to borrow the remaining ₱15 million from the bank at 12 percent per annum, your actual cost would be ₱150,000 (interest) plus ₱37,500 (lost deposit income), totaling ₱187,500.

Taking into account the cost of borrowing plus the opportunity cost of losing your income from the time deposit, undertaking this transaction would result in a negative carry of ₱87,500 a month, or ₱1,050,000 a year! Are you willing to take the risk that the property will appreciate enough to cover an income shortfall of more than a million pesos a year? That is a highly difficult proposition in today’s property market, given the softening prices for both sales and leases. At this point, I would not go into debt just to acquire the property.

Going back to our main story, burying yourself in debt for the wrong reasons will keep you financially hobbled for the rest of your life and strip away your financial freedom in old age. Making smart decisions and sacrifices now will go a long way toward helping you become debt-free. Does it make sense to buy that home entertainment system now with your ever-handy credit card—costing you monthly interest charges and principal amortizations—or should you just wait until you have enough money to buy it without the interest load?

I keep credit cards and use them for convenience, but I pay the full amount due every month so that I don’t incur any interest charges. Sometimes, not keeping up with the Joneses is difficult, especially with peer pressure from neighbors, officemates, and even your own family. However, if you want to break the chains and bondage of debt, you just have to bite the bullet and focus on a brighter future without debt dragging you down.

Knowing what is important and sticking to it is a key factor in being debt-free. It takes discipline, a firm commitment, and the support of your family to achieve this goal. Is all this worth it? It definitely is.