This article focuses on seven bad debt hacks that you can immediately apply to achieve financial freedom.
1: Understand what ‘bad debt’ is
There are two types of debt ie good debt and bad debt.
Good debt makes you richer. For instance, property investors use debt as their leverage to expand their property portfolio and thus, become richer as their properties’ value continue to appreciate over time.
Bad debt makes you poorer. For instance, many borrow money to buy things that depreciate in value over time, resulting in the person becoming poorer.
These debts include credit card debt and personal loans where interest costs are substantially higher than good debt like a mortgage.
2: Discover the root cause
Is it medical bills? Or a business failure? Are you in debt because of a pay cut or job loss?
If it is, understand this: It’s temporary.
In most cases, having excessive bad debt is more than just a financial issue. It can be a psychological issue.
For example, if you don’t have much money, why do you buy stuff you don’t really need? Attend expensive social gatherings? Take overseas holidays?
This takes some soul-searching on your part. Do you find yourself trying to keep up with the Joneses? Protecting your image of success? Impressing people whom you care about but who don’t care about you?
The list above is just a few examples to get your brain going. Treat it as an exercise. The goal is to know yourself better so that you can take a U-Turn in your financial situation.
3: Work with a partner
If you’re young and single, you may consult your parents for financial advice.
Or find a friend whom you trust and who is more financially savvy than you to impart some financial wisdom to you.
If you’re in a relationship, it’s ideal to work on these financial issues as a team. It’s helpful, but not easy, to be transparent about it and to find solutions together. Both of you will come out stronger as a couple after you have cleared your bad debts.
4: Create a spreadsheet
It’s helpful to create a spreadsheet, listing the following:
- Credit cards and personal loans.
- Outstanding balance of each credit card and personal loan.
- Interest rate for each credit card and personal loan.
- Monthly payments over the next 12–24 months.
If you aren’t sure how to do this, get a trustworthy friend to work it out for you.
All in all, a spreadsheet will give you a clear overview of your debt situation so you can strategise and prioritise which bad debts you want to clear off first.
5: Go on the offensive
If you have little financial resources to work with, you may set a small goal to raise another RM500 a month which is dedicated to clear off your bad debt.
It may be hard initially. But, if you learn how to raise RM500 a month to clear bad debts, you’ll know soon enough how to raise even more that you can use for investments to get rich.
Here’s a guideline that enables you to take baby steps towards your freedom from debt.
Firstly, you can split the RM500 a month into two categories: Earn RM250 a month and cut RM250 a month in expenses.
Make RM 250 a month
- Work overtime.
- Make more sales if you’re in the sales line.
- Take up one or two freelancing jobs.
- Sign up as a Grab Driver.
- Take on a part-time job.
- Give tuition classes.
- Sell unwanted stuff on eBay or Mudah.my
- Refer customers to your business friends for commission.
- Join a direct-selling business, sell insurance but stay away from money games.
Save RM250 a month
- Track your expenses. You’ll find items to cut out very quickly.
- Say “no” to expensive social gatherings.
- Say “no” to smoking, alcohol, nightclubs and KTVs.
- Say “no” to gambling.
- Cut entertainment expenses.
- Cancel expensive gym memberships.
- Cancel low-yielding unit trust investments.
- Cancel endowment plans with low sum assured.
- Exercise delayed gratification.
- Quit drinking premium coffee or just reduce four RM15 drinks a month.
6: Understand what ‘balance transfers’ are
It’s helpful to be aware of the latest promotions on Balance Transfers. Having said that, it’s important for you to check the following before agreeing to do a balance transfer on your credit card debt:
- Is it on an Effective Rate or Flat Rate?
- Is it calculated based on an Annual Rate?
- What are the Clauses for Early Repayment?
- How much is your Monthly Repayment after doing a Balance Transfer?
If you are unsure whether a Balance Transfer is to your advantage, you may consult a trustworthy friend before proceeding with it.
7: Celebrate small successes
Don’t forget to live life.
For instance, if you’ve made it a goal to raise RM500 a month and you did just that in the first month, celebrate with a “Milo Kosong Beng”.
It’s important to set small goals such as:
- Saving RM250 a month.
- Making an extra RM250 a month.
- Clearing the debt of one of your credit cards in three months.
These small goals are important as they keep you regularly focused on the needful whilst working towards true freedom from bad debt.
This article was published in kclau.com
Ian Tai is the founder of DividenVault.com, a platform that empowers retail investors to build wealth through ownership of fundamentally solid stocks that pay ever-growing dividends year after year.