There are two types of debt – good debt and bad debt.

Good debt makes you richer. For instance, property investors are experts in using debt as their leverage to expand their property portfolio and thus, have 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 drop in value over time, thus, resulting in becoming poorer.

These debts include credit card debt and personal loans where interest costs are substantially higher than good debt like a mortgage.

1. Uncover the root cause

To get out of bad debt, you must uncover the root cause of it. For some, bad debt stems from medical bills, a business failure, a pay cut or a job loss.

Whatever the root cause, do remember that your bad debt is temporary.

In most cases, having excessive bad debt is more than just a financial issue. It can be a psychological issue. Consider the following:

• Buying things you don’t need – are you trying to keep up with the Joneses?
• Attending expensive gatherings – are you trying to maintain an image of success?
• Going on overseas holidays – are you trying to impress people?

2. Work with a partner

If you’re young, single and in debt, consult your parents for financial advice. Who knows, they may even help you clear some of your debt.

However, you might lose a valuable chance to improve your financial intelligence as you’ve been bailed out.

If confiding in family is out of the question, try a friend who’s financially savvy.

If you are in a relationship, it’s ideal for you to work on these financial issues as a team. It’s helpful, but not easy, to be transparent about your debt and to find the solutions together.

One thing is for sure: Both of you will come out stronger as a couple after your bad debts have been settled.

3. Create a spreadsheet

List the following:

• credit cards and personal loans
• outstanding balance on each credit card and personal loan
• interest rate on each credit card and personal loan
• monthly payments over the next 12–24 months

A spreadsheet will give you a clear overview of your debt so that you can strategise and prioritise which to settle first.

4. 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 to settle your bad debt gradually.

Okay… so, where do you start?

Split the RM500 a month into two categories: earn RM250 a month and save RM250 a month in expenses.

How to make an extra RM250 a month

• Overtime.
• Make more sales if you’re in sales.
• Accept some freelancing jobs.
• Sign up as 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 an MLM, sell insurance, but no money games.

How to save RM250 a month

• Track your expenses and cut off those you can do without.
• 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 at premium coffee cafes.

5. Consider balance transfers

It’s helpful to be aware of the latest promotions on balance transfers. Do check the following before agreeing to 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 balance transfer?

If you are not sure whether a Balance Transfer is to your advantage, you may consult a trustworthy friend first before proceeding on it.

6. Celebrate small successes

Remember to live your life. For instance, if you succeeded in raising RM500 a month, celebrate that achievement.

Thus, it’s important to set small goals:

• Did I save RM250 a month?
• Did I make an extra RM250 a month?
• Did I clear debt on one of my credit cards in three months?

These small goals are important as they keep you focused on the needful on a daily basis whilst working towards true freedom from bad debt.

This article first appeared in kclau.com

Ian Tai is a financial content machine, dividend investor and author of over 450 articles on finance featured in KCLau.com in Malaysia, and ‘Fifth Person’, ‘Value Invest Asia’, and ‘Small Cap Asia’ in Singapore. He is a regular host and presenter of a weekly financial webinar with KCLau.com.