In today's society, being in debt seems almost inevitable.
Not many of us are able to buy a house or a car outright with cash.
Instead, we apply the 90/10 formula — that is, 90 per cent loan with 10 per cent down payment for these purchases.
Some people even go as far as 100 per cent financing with no money down.
In fact, we can apply the very same formula in almost every consumer items, from home furnishings to electrical appliances to even vacations.
This is mainly attributed to the increasingly consumer-driven society we live in, coupled with all those “Easy-Payment Instalment Schemes”that are widely offered. Before we realise it, we find ourselves going deeper and deeper into debt.
Let us identify some of the sources of our debts.
When it rains, it pours
Although overspending seems like an obvious culprit, there are many other factors that can contribute to financial debt. For example, unexpected life circumstances such as a divorce, major illness, unemployment or accidental injury compounding the problem.
Suddenly,wemay find it challenging to keep up with our monthly payments, and incur even more debt from late fees and interest payments.
We are plunged into helpless and stressful situation that affects critical areas of our life. Our relationship with our families and friends would be strained.
Our work may suffer and we may eventually lose our job.
Bills keep piling up and reminders keep pouring into our mailbox. We have no one to turn to except our “everfriendly” Mr Ah Long.
This would be the start of a sad and sob story, end of our financial freedom and the beginning of a never-ending financial bondage. As the saying goes: “It doesn’t rain but pours.” In order to start on the right track to reducing your debt load and managing that debt effectively, you have to be honest with yourself about howyou are currently handling your finances. Ask yourself these three questions:
•Am I ever late on paying the rent/mortgage payments?
•Am I constantly dipping into my savings account to cover some bills?
•Am I starting to use credit cards for purchases I used to make using cash?
If you have answered “Yes” to any of these questions, you may need to reassess howyou are managing your debt, and educate yourself on ways to improve it.
Let’s take a look at how we can manage our debts wisely.
Effective strategies for debt management
Determining a solid strategy to reduce your debt will help you to stay on track and reach your financial goals. Stay on target with these suggestions:
• Make a commitment to go no further into debt
This means that all your future purchases must be made in cash and if you don’t trust yourself with all those plastic cards, cut them up immediately.
• Create an emergency buffer
Normally, financial planners will recommend putting aside sufficient funds to tide over three to six months’ expenses. In this way, you’ll be able to hold to your commitment when other “surprises” pop up.
• Develop a realistic budget
This should include the monthly amount dedicated to debt repayment (which should be the first item on the list of expenses). Here, you’d need to cut-off all those “nice-to-have” items and focus on eliminating your debts first
• Create a realistic repayment schedule
In creating this schedule, we’d first need to prioritise our debts, beginning with the ones with the highest interest charges, while ensuring the required minimum repayment is made to the rest.
After settling the first one, move on to the next until all debts are eliminated. Some people may prefer to start with the smallest loan and work their way to the bigger ones later.
Use the strategy that works best for you but do remember to give yourself a small treat after repaying each debt and a bigger treat at the end of it all.
You truly deserve it.
• Be accountable to someone special
Nothing drives you more than doing something for your loved ones. They will be able to give you the required moral and emotional support to help you stay on track.
• Set up a visual system to show your progress
This can be in the form of a chart or graph that shows your declining debt balances each month. Paste it right in front of the television, on the refrigerator or even in the toilet! It will not only serve as a reminder but more importantly as a motivating factor to spur you on till you eliminate all your debts What a big relief! Finally, you ’re debt free and can feel a heavy load off your back. This may take from one to five years but make a vow to yourself to never ever get trapped into this situation again.
Continue on with that discipline and use the amount that you’d allocated toward your debt for other productive purposes like saving for your retirement or perhaps paying your mortgage off early.
If you are currently in debt, educating yourself on ways to become debt-free and sticking to those methods is the key to living a healthy financial life.
Agensi Kaunseling Dan Pengurusan Kredit (AKPK) is an agency set up by Bank Negara Malaysia to provide financial education, credit counseling and debt restructuring services to individuals. All services offered by AKPK are free of charge. For further information, please visit www.akpk.org.my or call us toll free at 1-800-88-2575.
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