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Monday, March 3, 2014

Managing your debt

To a lot of people, debt is a scary thing...but yet at the same time, it is a beautiful thing. Without debt, it would be very difficult for the middle class to consider earning property, vehicles and some other expenses. 

In our world today, with the credit card, there are so many ways for consumers, like you and I to manipulate future money in order to enjoy some of the luxurious goods. 


I have known people who disdain debt to a point that they would pay as much as they could as downpayment for a property even though most of the time, it only requires 10% of the property price. I have also known people who had piles of debts that it is impossible to settle it, and thus BANKRUPTCY. 

There is a simple rule of managing debt...DON'T SPEND MORE THAN YOU EARN, but it really isn't that simple, especially when you want to leverage on some of the low interest environment loan. If you only spend less than you earn, there is also a high likelihood of you missing the opportunity arises from leveraging on future money. 

Let's look at some examples: assuming that you are to buy a smartphone today, the high ends one, which cost us about RM2000 to RM2500. You have an option to pay the amount upfront or you could actually pay by installment...most of it are 0% as well, for up to maybe either 12 months or 24 months. I'll give you three different situation, calling them extra conservatives, reckless consumers and smart consumers. 

Situation A: The extra conservatives would pay upfront, because they are afraid of debt...thus only spending less than they earn, but they miss out on other opportunities. They could actually pay by installment and save the RM2000 or RM2500 on either FD (which only contribute 3% to it) or maybe some lower risk investments like stock markets or unit trusts. 

Situation B: The reckless consumers who failed to manage their debts wisely would opt for 12 months or 24 months installment, use the cash on hand to buy additional accessories. This would eventually lead to unsustainable debt in the future as one could easily overspend without knowing their own future cashflow estimates.

Situation C: The smart consumers would opt for either the 12 months or 24 months, and set aside the RM2000 or RM2500 for some savings on either FDs or unit trusts. But they would do more than that....they would actually record their cash flow for the future, and thus their debt could be monitored in a more systematic manner. 

From the scenario above, it is easy to see that debt might not necessary be a bad thing. It is how we manage our debt that make the difference. One of the most effective way to manage it is to treat our income, expenses and cash flow like how a company would do so....creating an Excel spreadsheet could help one to monitor easily and effectively. If you are overspending on your credit card, chances are you are not managing your debt effectively and could lead to a lot of unrest in the future. If you are those conservatives who are afraid of debt, I challenge you to start making use of our financial system to help you leverage your money. As for those of you who are smart consumers, maybe it's time to learn more on Excel to help you monitor your debt even more easier than it used to be. 

I will share some sample Excel spreadsheet that could easily help you to monitor your expenses, income and cashflow in the upcoming posts...stay tune!! 

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