Many among us often wonder that a debt-ridden life is not what we signed up for. Apart from being a source of constant stress, debt at times sucks the excitement out of our lives and demotivates us from taking bold steps to mitigate it.
The debt problem is more severe than you thought it is. An August 2017 report stated that 3.6 million credit card holders in Malaysia have RM36.9 billion outstanding balance! And that’s not all.
The household debt still stands at a whopping 84.3% of the Gross Domestic Product (at the end of 2017), although it has come down from 88.3% from the previous year.
It’s clear that many Malaysians are not managing their finances well. If you happen to be one of them, you definitely need to do more than just getting stressed over it.
Getting out of debt can be tough but by no means impossible. Take it like this instead: you’re not the only one who is indebted, and there are possibly many others who are in a far worse situation than yours
(feels better?). The stats also reveal that many people are actually working towards making themselves debt-free and succeeding eventually, and there’s no reason why you can’t as well.
And we’re here to help. Read on as we discuss in detail 5 useful tips to become debt-free!
1. Take stock of your debt situation
As we stated earlier, just stressing over your debt won’t help. You’ll have to face it to find a solution. Most importantly, you can’t afford to ignore it further and must act now.
Start by listing down all your debts and the interest you owe for each of them. Once you come to a total debt amount, calculate your debt-to-income ratio, i.e. your total debt divided by your total annual income. Many experts suggest that you should keep your mortgages out of this calculation as they’re long-term financial commitments.
For example, if your total debt (excluding mortgages) is RM15,000, and your total annual income is RM30,000, your debt-to-income ratio is (RM15,000/RM30,000) 0.5.
Experts suggest that if your debt-to-income ratio is equal to or more than 0.5, you need to revamp your finances and start working towards freeing yourself from debt as soon as possible.
2. Organise your debt
Once you have noted down all your debts, it’s time to begin the counter-attack. You can apply any of these three common debt-reduction strategies:
Snowball method: This is a popular strategy championed by renowned American financial guru and author Dave Ramsey. Under this technique, you make a list of all your debts and concentrate on paying off the smallest debt first until it’s gone. You can continue paying only the minimum balance (in case of multiple credit card debts) of your bigger debts till the smaller debt has been completely paid off. Once your smaller debt is cleared, now concentrate on the next bigger debt, so and so forth. The key is getting into the habit of repaying debts motivated by your “small successes”.
The major advantage of this method is that you’ll feel positive to take on the bigger debts (they won’t appear insurmountable anymore) once you’ve successfully cleared the smaller ones. Regaining self-confidence for the debt-ridden is far more valuable than you think it is.
Snowflake method: Snowflake technique is an extension of the debt-snowballing strategy where you also concentrate on allocating any extra or unused money — like side hustle, quarterly bonus, tax refund, or just surplus savings — towards clearing off the smallest debt first. You’re basically “micro-financing” your debts and these small, extra payments actually accelerate the payoff.
The greatest advantage of this strategy is that it motivates people to generate more cash to clear their debts — either by cutting down their costs or making some money on the side or both. And the motivation is real, thanks to the tangible results.
Avalanche method: Also called the debt stacking method, you basically focus on clearing off the debt that carries the highest interest rate first under this technique, like a credit card due (approximately 15%-18% interest), or a personal loan (approximate effective interest/profit rate of 14%-21%). This prioritisation of debt according to interest rate makes a lot of sense mathematically, as you’ll end up saving more on interest payments in the long run. That said, it’s slightly more difficult than the previous two strategies.
Whichever method you choose, just ensure you stick to your plan.
3. Cut down your expenses
Cutting down on your expenses to be able to generate more cash to pay off debts is an essential facet of any debt-reduction strategy. Many of us end up accumulating considerable debt because of our excessive spending, and it’s obvious that we need to regulate our spends to minimise our debt.
That said, you should rather set realistic and doable savings targets to prevent yourself from getting overwhelmed.
Here are some pro-tips to help you cut down on your spends:
- Identify the spending behaviours that got you into debt, and curtail them. Frequent shopping binges? Well, you don’t need so many clothes in any case, and your current smartphone just works fine!
- Use a budget calculator like BNM My Tabung, Fast Budget or MoneyLover to better manage your finances.
- Start cost-cutting with the bigger chunks first. Housing rental costs make a huge difference. Do you stay in a fancy apartment in a posh neighbourhood? Depending on feasibility, see if you can move to a cheaper house, get a flat-mate or move-in with your parents until you’ve made some headway in your debt-reduction strategy.
- Quit smoking today. Apart from the obvious health risks, it seriously damages your finances.
- Love eating out? Curb your cravings. Cook at home or go for an affordable and healthy meal subscription instead.
- Ramp up your savings while purchasing grocery at the supermarket.
- Sell things you don’t need or can manage to do without.
- Ditch those frequent Grab rides and use public transport or cycle (if that’s feasible). Drive to work? Carpool.
- Find gym subscriptions too costly? Use free fitness apps or opt for affordable pay-per-entry gyms.
These are only a few pointers, and you’ll be the best one to devise your own cost-cutting strategies. Once you get into the groove, you’ll be surprised by the amount you’ll end up saving. So, go ahead and try and track every sen that leaves your wallet or account. You’ll find abundant scope to cut down.
4. Increase your income
While cutting down on your expenses is very important, it’s a fact that you can only save up to an extent. You should simultaneously be on the lookout to increase your income so that you can allocate more funds to pay off your debts.
The gig economy is thriving in Malaysia. Why not make some money on the side? Check out these 6 short-term courses that will help boost your monthly income
5. Financial tools you may consider
There are a couple of financial tools that you may consider to solve your debt problem. That said, each of these tools have their own set of pros and cons, and it’s critical you understand them in full and take a call only if they work for you or make an actual difference to your debt situation.
Let’s dig a bit deeper:
1. Credit card balance transfer: Depending on your credit card debt situation, you may find this useful. It’s basically transferring a particular credit card debt to another credit card with a lower interest rate. At times, the banks will give you a window of say 6 months to 12 months to repay the dues at 0% interest. But you must consider the following things:
- Balance transfer is not a complete cure for debt reduction. Go for it only if you think you’ll be able to repay the dues in the stipulated low or no interest time span.
- At times balance transfers involve a fee.
- Ensure the new credit card has sufficient limit to accommodate your existing debt.
- You’ll still need a good credit score to get a balance transfer facility to a new credit card.
- Most importantly, you only buy some time with the balance transfer. Make sure you don’t use your old credit card and add to your existing debt once you transfer the debt to the new card.
- Experts suggest that you should also consider negotiating with your credit card issuer before triggering a balance transfer. Who knows, they may actually listen to you and decrease the interest on your dues to prevent losing a customer.
- Debt consolidation loan: This is a type of debt refinancing where you combine your multiple high-interest unsecured loans to one place and pay a lower interest rate on your debt in fixed instalments for a predetermined period.
Consider these points before taking up a debt consolidation loan:
- The greatest advantage of a debt consolidation loan is the psychological relief you get by combining all your smaller debts into a single, monthly payoff.
- Often their interest rates are lower than your credit card interest rates. However, you’ll be well-advised to get complete clarity on exactly how much you’ll be paying in a month towards your debt consolidation loan and take a call only if you think it’s worth it or you’ll be able to manage to pay the single instalment.
- A debt consolidation loan is still a loan that you need to repay, so financial discipline is a must.
- You need a good credit score to take up such a loan.
- Even if you go for a debt consolidation loan, make sure that the amount you save by paying lower interest is put to good use like building your emergency fund.
Start working towards becoming debt-free TODAY!
A strong will, smart plans, and financial discipline are probably your greatest weapons to take on your debt. It may appear insurmountable now, but believe us, with some effort, targets will definitely turn doable. Many people have done it in the past, and you can do it as well!
Start with baby steps like posting an online ad to sell something unneeded or making a list of all your debts or researching on side hustle options or anything else you feel is important. But it’s crucial you don’t delay strategising your debt reduction plans and executing them.
The key is to do the above without getting stressed, as stress will only cloud your analytical thinking.
Lastly, never hesitate to seek help if you think you’re finding it difficult to solve your debt problem. Speak to a friend/colleague or a family member for solutions, read up more on debt-reduction strategies or reach out to AKPK for financial counselling and other tips to mitigate debt.
Here’s wishing you all the very best!