Best Ways To Stay In Control Of Your Debt
Being in debt is not necessarily a bad thing. In fact, if you borrow cautiously, it can actually help you increase your financial wealth. That said, poor debt management could land you in financial hardship.
Here are some evergreen tips to help you stay in control:
Borrow based on what you can afford
Only borrow what you can afford to repay with your current income. Do not borrow based on an expected future income, as things might not turn out as expected. Bank Negara recommends that Malaysians do not exceed a Debt Service Ratio (DSR) of 60%. The DSR is calculated as [all your debt repayment obligation] divided by [your take-home income].
For example, if you take home RM3,000 a month in salary (i.e. after deducting EPF, taxes and SOCSO), you should not be spending more than RM1,800 (ie. 60% of RM3,000) on paying down your debt.
Minimise credit card fees where possible
Focus on paying off your entire credit card balance at the end of each month to avoid interest charges. This is because the interest charges on credit cards are usually higher than on conventional loans.
Even if you are not able to pay off the entire balance, aim to pay as much as you can, as any extra payment would contribute to reducing your outstanding balance faster, saving you money.
Opt for interest-free, easy payment schemes where possible, as such schemes allow you to spread your purchase over a period of time – usually over a 6 to 12 month period – without additional charges as long as you pay on schedule.
Use automatic payment methods
It’s not uncommon for people to accidentally miss a payment every now and then. However, a missed payment especially on a credit card or loan installment can cause you hundreds of ringgit more in penalty leading to more debt.
Consider using automatic payment methods to avoid missing the due dates of your bills. Most banks allow you to arrange for auto-debit payments to automatically take funds from your savings account to pay your monthly bills.
Get in the habit of having a budget
Starting and maintaining a personal budget allows you to plan for the things you’ll be spending money on, ahead of time. Once you can do that, you will be able to plan for your true expenses, be less likely to splurge on impulse purchase, and stay in better control of your debt.
Plan your expenses and stick to it. Discipline is key. If you find that you often can’t resist the temptation to spend, set up an automatic transfer on the day you receive your salary to pay off some of your debt.
This article was first published in June 2012 and has been updated for freshness, accuracy and comprehensiveness.