Debt can be damaging if it gets out of control. Hence why you should be able to manage your debt wisely. Note that poor debt management will lead you to great financial strain in the future. However, debt can be good or bad depending on how you use it. But before that, how do we distinguish between the two?
When you take out a loan to purchase something that will increase in value overtimes, it’s different from borrowing for quick gratification. So you’re in debt for an investment? Yes! Debt can be an investment if you use it for things that will grow in value and contribute to your financial health. For instance, a student loan is considered good debt as the education that you’ve acquired will help build up your value and raise your future income. Housing loans and certain business loans are examples of good debt. These types of loans usually carry a lower interest rate too, especially with the recent cut in OPR.
If you’re in debt for the sake of owning a pair of designer shoes or a rack of clothes, then you’re in bad debt. A debt is considered bad if you use future money for unnecessary purchases. All these things do not appreciate in value and will only stay for a short period of time. The most common bad debt is credit card debt. Why are credit card debts bad? It’s due to the high-interest rate imposed and the nature of items purchased which will eventually degrade in value. Plus, having a high balance with credit card debt will have a negative impact on your credit score.
Now let’s get back to our main focus. How can we manage debt wisely?
If you have several debts ranging from house, car, education, credit cards to personal loans, you’re now in a perfect state to create a list. List down all types of debts, the amount, monthly payment and any necessary details for you to keep track of your debt payment. Refer to the list whenever it’s time for the payment and keep on updating it with the changes in amount be it before or after you have made the payment.
Having a list is useful for you to stay abreast of your debt and monitor your repayment. Knowing how much you owe and to whom you owe the money assist you to make the debt repayment on time. You can also decide on which debt do you think should be prioritized. The best strategy is to prioritize highest interest debts over anything else. Paying off a high-interest rate debt first actually helps you to be debt-free faster.
Keep your urge to spend at bay as you’re now in the process of becoming debt-free. Developing a budget in your debt management strategy helps to monitor and plan your expenses. It is better to plan your expenses far ahead to make sure you have enough savings in case of an emergency. At this point of time, it is advisable for you to drop your expensive habits as you might need to cut your budget and contribute it to your debt repayment. It sounds hard but remember that our aim is to get out of this debt as quickly as possible.
However, if you find it hard to resist the temptation of spending, then perhaps you could pay off some of your debt by setting up an automatic transfer and let it be automatically deducted from your salary.
Juggling between saving money and paying off debt is never easy. You want to become debt-free but at the same time, you need to save up for the future as well. In this situation, it is better to focus on paying off your debt first. But that doesn’t mean you should forego saving altogether. It is better for you to build or increase your emergency fund if you don’t want to end up borrowing again at the end of the month. During this process of repaying your debt, you might experience tighter cash flow. But with saving, there is nothing to worry about as you can use it to cover your living expenses when the need arise.
If money is truly an issue and there’s only so much you have left after deducting everything, consider increasing your income instead.
Even if you can’t afford to pay a lump sum at a time, paying at least a little more than your minimum payment that is required each month is better than not paying at all. Interest rate charges on credit cards are usually higher than those charged on conventional loans. Thus, making at least more than the minimum payment helps you to offset your debts quicker, and reduces the overall interest paid to the bank.
If a list could help to keep track of your debt, then a monthly schedule of bill payment could assist you and ensure you’re paying the debt on time. You can also refer to the schedule made and figure out which bills to pay first. Note that if you have more than one outstanding debt, prioritize the one with the high-interest rate first.
On top of interest-fee, there’s another fee to take note of – late charges fee. Pay your debt off on time to avoid the fees. Consequently, we also want to make sure to maintain a clean debt-repayment record with the banks. It is extremely crucial as the moment you miss your payment, your debt snowballs along with the interest charges. Ultimately, it affects your credit score – pushing it into the red and will cause you much inconvenience in the future when you need to apply for other loans.
If you find yourself struggling in paying off the debts even after applying those strategies, getting professional help to manage your debt repayment might be the best answer.
The Agensi Kaunseling dan Pengurusan Kredit or Credit Counseling and Debt Management Agency (AKPK) is a debt relief company in Malaysia that is there to help you the moment you find your monthly debt repayment has become unaffordable. You can read more on AKPK here.
No matter what type of debt you’re in, to be debt-free might take years or even perhaps decades. But worry not as there is always a way out. Your dream of being debt-free can be realized once you create and stick to your own debt management plan. The moment you have gotten your debt paid off, you can finally live your life to the fullest as you wanted.
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