Pay Off Debt With These Methods11 Aug 2022
Almost all of us have taken on debt. Taking debt can help build wealth or increase income over time. Examples of good debt include mortgages, student loans, and small business loans. But debt that becomes challenging to pay off poses a long-term challenge to your finances. According to economists, as of the first half of 2021, Malaysia’s household debts are still at a worrying trend. Here are ways to pay off debt fast without forfeiting your other important financial benchmarks such as a healthy emergency fund or retirement savings.
Pay off the smallest debts first
This is also known as the debt snowball method. Here’s how it works:
1. Budget enough to cover the minimum monthly payment for every debt.
2. Use the extra money to pay off your smallest debt first.
3. Once your smallest debt is paid, follow steps 1 and 2 again but target your next smallest debt.
The method helps build your motivation by settling some debts fast. The downside is that the smallest debts may not be the debts with the highest interest rate which could mean you end up paying more interest. If you’re facing reluctance to pay off your debts anyway, the debt snowball method is easy to implement and might be the thing to kickstart your debt-free journey.
Stop credit card spending
According to Bank Negara in 2018, 47% of Malaysian youths have high credit card debt. For those who struggle with credit card debt, one way is to completely stop using credit cards. It can prevent damage to your credit score, impulse purchases, and the road to financial ruin.
Here are some ways to stop:
a) Place credit cards in an out of reach but secure place. For example, your money safe or drawer.
b) Remove credit cards from your online accounts.
c) Spend with cash only. Physically seeing the exchange of money and feeling the drain in your wallet can reduce your credit card spending urge.
If you are having trouble with credit card debt, you can apply to be part of Bank Negara’s Credit Counselling and Debt Management (CCDM) Agency / Agensi Kaunselling dan Pengurusan Kredit (AKPK) debt management programme for advice.
Sell unused items
Money doesn’t grow on trees to pay debt off. If you haven’t taken inventory of your unused items, this can prove a relatively fast way to a significant contribution towards your debt repayment. Some popular unused item ideas include furniture, electronics, and cars. Try selling items that require maintenance or that depreciate over time.
Budget for your debt
One general rule of thumb is that no more than 36% of monthly income should go toward debt. By budgeting for your debt, you will be better able to budget for your emergency fund so that you don’t incur additional debt if something unexpected occurs. It also ensures you meet your minimum debt payments every month to avoid late fees and hurting your credit rating. With a clearer understanding of your minimum payments, you can then automate the payments.
No matter the method, paying off debt requires discipline. It’s important when applying for a new loan, saving on the cost of borrowing, or just your overall mental well-being. Think of how this can give you a head start on your life goals.
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