Everyone, young or old, has had to deal with some amount of debt. Knowing how to manage money properly will help avoid unsettled debt piling up in the future.
The 21st edition of the Malaysia Economic Monitor 2019, revealed that some 60% of bankrupt borrowers are 25 to 34 years old.
Careful management and timely payments can be the difference between having a debt monster to battle in the future or a comfortable financial life.
1. Be aware of debt
Make a list of all debts and total it up. Include creditors (individuals, banks, credit card), monthly payments, due dates and interest rates.
Download a credit report from the Central Credit Reference Information System (CCRIS) website to confirm the debts in one’s name.
This system was created by Bank Negara Malaysia’s credit bureau to provide standardised credit reports for potential borrowers to provide to banks, for example.
Set automated reminders to review this list periodically to be aware of all debts and the effectiveness of the debt management plans.
It is worthwhile for married couples to both do this as one spouse’s bad credit rating can affect that of the other.
2. Determine which debts to pay first
Now it’s time to identify which debts should be paid off first. Disregard how and when for now, and focus on priorities.
One of the first debts to settle is credit cards. Credit cards have higher interest rates than other debts.
Paying off larger debts is a motivator to pay off other debts after that and creates a sense of accomplishment.
Use the debt list to regularly track payment amounts, outstanding debt and due dates.
Those who are having trouble deciding which debts to pay first should consult a licensed financial planner for a professional opinion on which debt could have a bigger impact on the financial future.
3. Create a debt payment schedule
Now that the priorities have been set, it’s time to look at how and when.
Create a debt and bill payment calendar to keep track of which payments must be made first on receipt of one’s paycheque.
Fill in the debts and bill amounts for every due date. An electronic calendar, such as Google Calendar, allows payment reminders to be set two days or one day before the due date.
A detailed schedule helps maintain discipline in making payments on time and makes sure there is enough money.
Make payments immediately after receiving your paycheque. Discipline is key to ensure a better credit score.
A licensed financial planner can create a financial plan that helps you juggle cash flow and other commitments while paying off debt.
4. Use a monthly budget to plan expenses
Setting a budget makes sure there is enough money to cover monthly expenses. Plan in advance and take early action if the paycheque will not cover debts and bills this month or next.
A budget helps in deciding where to put any extra money left after expenses are covered. The rest of the money can be used to pay down debt faster.
Set automated reminders to review expense tracking daily, weekly, monthly and quarterly to keep track of spending trends.
5. Reduce unnecessary spending
If you have debts, be honest with yourself. Are you living beyond your means?
Can you reduce your current rate of spending? How about eating out or ordering food in less and cooking more at home?
Trimming your spending means the money can be put to better use, for example, paying down debt or creating an emergency fund.
6. Increase your salary
Incoming money (income) should always exceed spending (expenses). When expenses exceed income, that is when debt builds up.
If, with all the budget planning and reducing expenditure the income does not cover expenses, it is time to increase the income.
Ask for an increment, find a side income or change your career path. It may be time to pick up new skills for better rewards.
7. Use the emergency fund if necessary
Bad things happen, such as losing a job, which would make it even more difficult to continue debt repayments.
This is the time to use the emergency fund to cover expenses and debt payments while looking for a new job.
To create one, allocate at least 30% of the salary for savings and put it in a separate bank account. Try not to touch it. This will help make saving a habit and create a buffer for bad times.
8. Get professional advice
If there is still a problem resolving the current debt situation, professional help may be needed. Bank Negara’s Credit Counselling and Debt Management Agency was set up in 2006, to provide debt counselling.
A licensed financial planner can also help in planning a debt settlement plan and maintaining good cash flow in future.
Consulting a financial planner is a good way to reduce the burden of creating a financial strategy and to access better information on financial matters.
Conclusion
It is not easy to get out of debt, especially with limited knowledge about your credit situation and current financial standing.
There is no shame in seeking help, either from a credit counselling agency or a financial planner, to help settle debt and provide a sustainable financial plan to protect your well-being for now and in the future.
This article first appeared in MyPF
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