A Practical Approach to Debt Management series
Understanding debt as only a ‘symptom’ and that the root problem is something else
By P Raju, AKPK Melaka
As stated in my previous article, A Practical Approach to Debt Management, let’s discuss the first strategy for managing debt.
Handling debt is just like losing weight: the more prepared we are to deal with it, the better the outcome. That said, in the first place, we must understand that debt is only a symptom and that the root problem is something else. The chart below illustrates some of the most common underlying symptoms of debt:
So, let us tackle debt by focusing on the underlying factors instead of the debt itself.
Poor Spending Habits
To lose weight, you need to do two simple things – eat less and exercise more. Reducing debt and getting ahead is simply a matter of spending less than we earn and saving more. However, these are two simple things that may not be easy to do. It is always easier to gain weight than to lose weight. Likewise, it is easy to spend even if we do not have the money. This eventually leads us to more debt.
It is all about developing healthy habits and changing bad habits. To cultivate a good spending habit which is the foundation in managing debts, one’s spending priority should be based on need rather than want. So, in order to spend wisely and to avoid impulsive spending we need a budget. “A budget is people telling their money where to go instead of wondering where it went.” A budget helps to track our cash flow. Success comes in our ability to track and understand our cash flow just like tracking calories in weight control.
Secondly, one must become a conscious spender. Conscious spending means:
i. you have paid yourself first
ii. you decide exactly where you are going to spend your money
iii. that you choose to spend on some things and not on others
Instant gratification
In today’s marketplace with catchy advertisements and easy credit facilities, people tend to spend with little consideration for what they can actually afford. People who steer towards ‘instant gratification’ are willing to spend more than what they earn, which will undoubtedly increase their respective debt levels.
Instead of instant gratification, we must cultivate the habit of ‘delayed gratification’. In a budget, one should allocate a certain portion every month for future purchases. Such a practice will avoid us from buying on credit and on installment basis, thus helping reduce our debts.
Live within one’s means
We must constantly spend less than what we earn. To avoid unnecessary debt, we must either earn more or spend less to live within our means.
Save for rainy days
Saving for emergencies is equivalent to keeping a functionable spare tyre in your car. It is advisable to set aside three to six months of gross salary in a separate special bank account. Uncertainty is always there, for example, unexpected medical expenses, sudden car repairs, etc. which will prompt us to borrow money if we do not have sufficient funds. So, preparing well for a rainy day will help prevent from incurring unnecessary debt.
Financial capability
You may have the knowledge and skills of money management and are aware of the problems caused by unnecessary debt. You may even have sought advice from a good credit counsellor or financial advisor but that does not guarantee your success in managing your finances well. You need to build your financial capability by cultivating the right attitude, motivation and financial behaviours to manage your debts effectively.
We encourage you to participate in AKPK’s POWER! Programme now.
Conclusion
Everyone can manage their debts effectively by identifying the root causes of debt and by adopting the right debt-reducing strategies.
Note though, that not all forms of debt are necessarily bad. If debt is constructive, meaning to say that it is productive, one can earn out of it. For instance, borrowing to invest in funds such as Amanah Saham issuances. Such productive debt is called ‘good debt’ if the earnings outweigh the interest charged to borrow that particular sum of money. Likewise a home loan where the house is your asset.
Good debt consists of money borrowed for anything you need without wiping out cash reserves or liquidating any investments. Only take a loan for which you can afford its monthly payments. Good debt makes your money work harder for you.
Note: Mr Raju will discuss the other strategies in the upcoming newsletters. So don’t miss the next Read$ens!