Being in debt can be a difficult and harrowing experience. How do you avoid getting into bad debts? How can you get out of debt if you are in this situation?

Debt Defined

Debt is when you are owing money to another person/entity. Depending on the arrangement made, you are required to pay back both the principle amount owed plus interest over a period of time. Debt may be secured tied to a collateral like a house OR unsecured such as credit card debt or a personal loan. Depending on the loan as well, your debt may be fixed at a certain rate such as a fixed rate home loan or a variable rate such as a home loan tied to the base rate.

The most common debt are credit card debts as it is very easy to not see or feel the money being spent while charging to a piece of plastic, especially with the ease of installment purchase plans. The most devastating debt is being overly in debt for property investments where you feel rich seeing the supposed value of your properties, until the market faces a correction and you are unable to service your property debts.


Top 10 Causes of Debt

  1. Spending more than you can afford
    • Increased expenses through living a lifestyle you cannot afford keeping up with the Joneses (or Joharis).
    • Being unable to resist the temptation of shopping (and nowadays made even easier with online shopping).
    • The credit card minimum payment trap where you only pay the minimum payment and your credit card debt spirals in a bad snowball of 18%.
  2. Reduced income through loss of employment or business failure.
  3. Gambling which is addictive and destructive where the house has an edge, but you are sure you are going to win big next and recoup all your losses.
  4. Bad investment choices by investing in another person’s business/system/ponzi scheme motivated by greed which ultimately will collapse.
  5. Taking on too much leverage for your business/property/other investments, and getting wiped out when your investment falters and creditors request for money (i.e. a margin call).
  6. No emergency savings in case of an actual emergency situation.
  7. No medical insurance to cover major medical illness, either for yourself or a loved one.
  8. Lack of personal finances planning for expenses like festive occasions, renovation or other major expenses. This is compounded even more so if you do not communicate regularly and truthfully with your spouse.
  9. Divorce as you face legal bills, may need to pay alimony, and may be responsible for debt accrued by your ex-spouse.
  10. You are the guarantor for another person’s debt/borrowing. And your close friend/family member suddenly disappears…


Debt Reduction Approaches

  1. List down all your debt, the interest rate being charged, and minimum payment requirements.
  2. Keep a small sum in cash (between 1,000 – 10,000) as an emergency backup (only for new and actual emergencies!).
  3. Spend every other dollar attacking your debt (and avoid taking on any new debt!)


Advanced Debt Clearing Strategies

Snowball vs Highest Interest approach

  • To save on total repayments, it makes sense to tackle your highest interest charging debt first while paying the minimum on the rest.
  • Emotionally, small wins by paying off the smallest owing amount first and racking up that psychologically important victory before tackling the next largest amount may work.
  • Our suggestion: if your debt worries you, clear the smallest owing amount first. Else take the numbers approach with the highest interest debt first.


Debt Consolidation

  • For ease of tracking with a single payment date and possibly lower interest payment rates, you may be able to consolidate all your debt into a single debt.
  • This can be done with a balance transfer, or if you own a property with equity by refinancing your property.
  • Tip: Do be careful as if you screw up the new debt, you may end up in even worse shape.


The 3 reasons to “maybe” consider debt

  1. To invest in your own business: Sometimes it may make sense to take on a business loan when your business needs funds to grow rapidly at a time of good opportunity.
  2. To invest in your own education: Learning new skills or having a certification you require may be an investment in yourself that pays in the future.
  3. To invest in other investments: Very high risk and only if you know what you are doing. Leverage is a double-edged sword but can work to your advantage if you have the edge.


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