Manage Debt Wisely to Avoid Financial Distress
Lately, Ahmad often complains. The salary he receives every month seems insufficient after deducting all the debts and bills that need to be paid.
Not only that he can't spend lavishly, but the desire to pamper himself and his family occasionally is also tough to materialize.
Sometimes, when there is an emergency, such as a broken-down car or his child needs urgent treatment, Ahmad has no choice but to use a credit card even though he realizes that the unpaid amount is getting bigger and bigger.
As his financial situation worsened, Ahmad met his old friend, a certified financial advisor. His friend helps him to analyze his financial situation, and below is his explanation:
1. Ahmad credit card debt is too high
At the time he sought advice, his credit card debt had reached RM30,000, and he was only paying the minimum amount every month.
2. Ahmad drives a luxury car and stays in a house beyond his means.
With a monthly salary of RM8,000, Ahmad pays RM1,100 monthly for a car and RM2,000 for his house. That does not include personal loans due to home renovations and furniture purchases, which cost RM600 monthly.
3. High Monthly Expenses
Meanwhile, the monthly bills that need to be paid sometimes reach RM1,000, including electricity, Astro, broadband, children's education, and so on.
Fortunately, Ahmad's wife also works and can help Ahmad reduce his burden on daily expenses. If not, Ahmad's financial position will be more of a strain on his neck and continuously prevent him from enjoying life.
Good Debt Vs. Bad Debt
The main reason that caused Ahmad's financial distress is that he incurs an excessive debt, which is not in line with his income.
With this, he breaks the most important rule in financial management, which is to spend below your means.
Failure to comply with these basic rules will cause us to be entangled with debt, and later, we will find it difficult to enjoy life because of the constant financial burden.
As such, sound debt management skills are among the most important financial skills you need to master to have a solid financial position.
The first step to managing debt wisely is to ensure that we understand and can distinguish between two types of debt: good and bad. Good debt will increase the value of your wealth, while bad debt will remain a liability.
Therefore, bad debt such as credit cards and personal loans must be minimized or, better still, stay out of it as the interest rate is relatively high. Only use credit cards excessively if you have ready cash to pay for all the purchases. Paying only a minimum will set a debt trap that might confine you for a long time.
Many experts are still debating whether a car loan is a bad or good debt as it has different merit in an individual life. As such, when deciding on a car, you must calculate how much you can afford monthly, including the vehicle's wear and tear.
In reality, car loans are one of the main reasons many young people go bankrupt as they buy cars way beyond their means to live up to their dream lifestyle.
They did not consider that other than monthly installments, there are expenses such as service, petrol, and yearly insurance that need to be taken care of.
Failure to manage bad debt will often lead to a failure in managing money, affecting quality of life. When your cash ties into the monthly commitment to pay your loan, you will be in agony as you can’t enjoy your life.
As such, do not take any loan without a lengthy thinking process; evaluate the interest rate, your ability to pay monthly installments for an extended time, your current and future commitment, and any other tiny issues that might worsen your financial situation if you add more debt.
If you are already stuck in an excessive debt, the first step that you need to take is to organize your debt immediately. The rule of thumb is to pay off debt with the highest charges, such as credit cards, followed by personal loans.
Reduce The Need To Take Debt With Investment
We need to build an emergency fund to reduce the need to take a loan, especially during an emergency. To build a solid emergency fund, look for low-risk investment instruments such as ASB or fixed deposit so it is safe and we can earn consistent returns.
Creating a budget will help us to analyze our financial position consistently. We can manage our debt, spending, and investment with the proper budget.
Financial independence does not mean debt-free, but we can sleep well every night without worrying about our finances.