How to Manage Your Debts More Wisely
by Lee Xin Hui, Rachel. |
Crunch is partnering with Hey Alfred - the smartest financial assistant app powered by Ai to help you track all of your financial assets; to bring you this series.
In this series, we want to provide you with helpful information to gain better financial literacy. Through this journey, you will learn how to manage your money better, save more and secure your finances for the future. If you often find yourself clueless on money matters like paying your first income tax, applying for loans or even how to save more without feeling miserable, this series is just for you.
We got your back. It’s time to take control of your #MoneyMatters.
Whether we like it or not, we’re either going to be facing or currently indebted after graduating: mostly because of our student PTPTN loan. Then as we move from young, adulthood into ‘actual’ adulthood in our mid-twenties, the debts will come filing in, from housing and car loans to credit card payments; you find yourself wondering ‘When is this going to end?'.
Most of us will have debts along the way in our lifespan because of the assets and liabilities that we own like a house, a car, etc. It’s just a matter of how much you’re in debt and if you’re aware of them.
But first of all, let’s address one important question:
How much debt is too much?
Here’s a good rule to follow: all your debts should not exceed 36% of your gross income.
Say if you earn RM3000 a month, all your debts should not exceed RM1080 monthly. So to be safe, the next time you make a big purchase, make sure to check if you can afford it by checking your current debts.
Another thing to note is your Debt Service Ratio (DSR), meaning, the number that banks use to measure your ability to handle your monthly debt payments. Your DSR is calculated by dividing your total debt payments with your monthly income, so if your DSR is more than 60%, banks usually won’t lend you money.
Here’s a simple formula that you can apply:
[Total debt payments / monthly income x 100%]
RM1800 / RM3000 x 100% = 60%
Using the illustration above, if you make RM3000 monthly, and your total debts are already more than RM1800, the chances of you getting additional loans are pretty slim.
It’s completely normal to have debt, sometimes the different stages in our lives means it actually makes sense for us to be in debt. But having no plan to pay it off? That is not okay.
Fret not! We have your back. Here are 4 steps to help make sure you pay off your debt.
1. Make a list of all your debts
By all your debts, we mean student loans, mortgages, credit card bills, and even money borrowed from your family and friends. The list should include:
Total amount owed
Minimum payment amount
This is so you’d have a clear overview of how much you’re tied down with on a monthly, yearly basis; and from there, it’ll be easier for you to work backwards.
2. Rank your debts
Place them in the order of when you want to pay them off. There are 2 ways experts would advise to go about this:
The Snowball method: Paying off from the smallest amount to biggest. This is good for keeping the momentum up, and giving you that motivation of ‘completing’ a debt, no matter how small.
The Avalanche method: Basically the opposite of the snowball method, paying off from the biggest amount to the smallest. If you are capable, this makes more financial sense as you end up paying less interest rate as a whole, thus saving you more money in the long run.
How you choose to pay them off is up to you as the decision depends on your current financial circumstances and priorities; at the end of the day, the most important thing is that you stick to it.
3. Focus on one debt at a time
We suggest you tackle the debt on top of your list first; put extra money into paying off this first debt, while making all the minimum payments on the rest of your debts.
Why? Focusing on one debt at a time means you can pay off your initial amount faster, and less money goes into paying interest. If you try to pay off all your debts at the same time, this will take you longer to pay off even one debt, and you still end up paying more interest across all of them.
4. And lastly, on to the next one
Once the first debt on your list is paid off, move onto the next one while still paying the remaining debts’ minimum payments (refer to step 3). Repeat this until all your debts are paid. It may seem to take forever to pay off that first debt, but once you gain momentum you’ll love the feeling of crossing each one of your list.
Extra step: Build up your savings
Some would say to pay off all your debts first, and then focus on putting extra money in a savings account. However, it is important to have savings, no matter if you’re in debt or not. Even before paying off your debts, make it a point to have an Emergency Fund saved (at least 3 months’ worth of living expenses) to avoid you using your credit card or resort to borrowing money (and going back into debt again!) should any unforeseen circumstances happen.
We know it sounds tedious and stressful, but keep in mind that debts will have to be paid off sooner or later, and putting them off will only worsen the situation. So be mindful of where your money goes to as you allocate portions of your income according to your priorities, and I would say paying off your debt at your twenties is pretty high up in that priority list.
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