This is the original version of article which has been featured in Imoney raking close to 900 shares on Facebook. Awesome!
The year 2013 marked my personal triumph towards financial personal management. In this year, I have significantly changed the way I spend, save and think about money. Coupled with my new found addiction towards minimalism since 2011, it’s a perfect combo for me to let go of incessant ‘need’ (read want). I can finally say that those years of impulse shopping and having debt crawling to my dreams are behind me now that I have ditched the last cent I owe to the bank just by the end of 2013.
Since my working adult days I have never thought that personal finance management is important. Being young, rich and evil; I scour at every opportunity to own things that I want, rather than what I need. From there I never really recovered, swiping my credit cards as I go and barely make ends meet by paying the minimum amount. Heck, sometimes I even missed paying the minimum. In the end, after 3 years into working life – I accumulate a total debt of RM60,000. Half of it comes in as my personal loan for marriage, and the others are hardcore impulse spending.
Marriage and arrival of Lana require some additional expenses and soon I realized that I need to change. This led me to finally be free. Looking back, these are the strategies that I found crucial in my journey getting out of those debt.
1) Know the WHY
This is the first step which is all too important as it provide the push to my action. Improving my financial state is a long slow process and the reason should be epic. For me, the arrival of Lana and marriage led me to realize that I am in trouble. I need to have sufficient money so my wife and Lana would be comfortable. Knowing them comfortable provides me with peaceful feelings that I have given them the best that I could.
This also acts as a nudge, triggering me that a lot need to change. I need to change the way I spend completely from before. I began immediately by listing all my monthly commitments and debts. All too often, previously I would ignore this process preferring instead to live in false belief that I’m doing well. I should warn you that the action required are old-school & unconventional it stretches your comfortable limits. I can do it, you should be too. Stop, list the debts and embrace that we need to change.
2) Get Thy Policemen
I’m lucky because apart from the internal factor above (realizing I’m in a deep black hole), I also had anti-impulsive (is there such a word?) friends; Mad & Hilmi.
There is a huge gap in the way I think back then. I would feel completely fine buying that RM1900 Gucci sunglass one day out of the blue. In contrast, these folks are value-freaks and will need at least 3 months for a major coupe. Mad would talk at length how a trip 6 months away would require a hideous man invention called short-pants while Hilmi would need an excel file of comparisons for the phone he plans on buying. These are good policemen to steer me from impulsive buying. They helped to wrest control of impulsive out of me (at least the major ones).
In this process I would need to inform them up front for any major purchases. They would then advice me that I may or may not require the thing. For example that new sport rims for my car costing RM3,000 is not required while RM4,500 for my Master’s degree is perfectly fine. This is however being done only after I know exactly how to repay the debt (if I were to use 0 percent instalment via credit card) or having the cash up front. Looking back, these instil a new thought process that I never had before, being a carefree hippies; Delay the Buying by thinking through.
The first questions Mad and Hilmi would ask were:
- Is this item essential, now?
- Can you wait for another 3 months?
- Do you have money allocated for this purchase?
When the at least one of the answers are NO, I know that I simply can live without the items. It forces me to delay the purchase until I had the fund. Nowadays, all my want items are funded by a Gold envelope. I realize before, I had that false belief that I have that money now, when the fact it was borrowed money from the bank which will bite back later. Credit card is evil.
Find those policemen (your friends, spouse or siblings). They are the push that you need and it’s good having them around.
3) Kill off the debt as FAST as humanly possible
There are two school of thoughts here. Some would say pick the highest interest debts and pick that to pay first while Kim Kiyosaki would say pay the smallest amount of debt first. It’s really up to your liking, but I prefer the latter.
Among the impulse debts I have are RM3,000 AEON credit for Macbook and RM28,000 VISA credit card debt. I pay the AEON debt every chance I got, consistently while only paying slightly over the minimum for the VISA.
- That ‘ol friend paying me the money he owes me from long time ago.
- Getting a bonus.
- Monthly salary.
- Allowances from offshore visits.
It all goes to kill off that AEON credit and bring my first taste of glory. Doing it this way, I had more confidence of succeeding as I had my win over my belt already starting up. Pick your smallest amount debt and kill them off fast. You’ll savour the winning and it creates the momentum to get you going.
This is a huge topic on its own. As a summary, I need to know how much I can have every month for living expenses and how much I can pay the debt every month. In debt busting-budget, I stripped it into only the essentials (my current budget would include more add-ons) as follows:
- Utilities & Bills (telco, internet, car, house rent, insurance coverage)
- Cyclical Fees (car insurance & driving license)
- Essentials (food, fuel, groceries, childcare fee, contributions)
This determines how much I have left and how long it would take to kill off all the debt. For my case, I would have a remaining balance of RM2,000. As my total debt is RM60,000; I would need around 15 months to settle the debt (notwithstanding any other source of income).
It looks simple, and it is simple. However, as a young hippies who spend RM6,000 every month consistently this could prove a challenge.
We definitely need some grit here to restrict the urge to buy.
Important points to note:
- I don’t save during debt-busting mode. I just think of it as a punishment for my lack of financial management previously. Besides, I consider saving as another level of personal finance hence the paramount importance is getting out of debt first.
- I’m not happy with how long it would take for me to settle the debt, so at times I even limit the spending on essentials (carefully noting every transaction in the process which will be described below).
- There are some occasions where I need to use some money for claimable expenses (hotels, taxis and meals) due to my work. In this case I either plan the travel upfront so I can get advance fund from my company or decline to travel. This will need some determination on your part.
5) Monitoring EVERY transaction
I smirk at one personal magazine suggesting monitoring of spending to be done at least a year towards a good financial management. I cannot grasp on why I need to do it even a month, let alone a year of jotting downs the RM1.50 parking ticket and that RM9.50 nasi ayam lalapan.
Now that I have done it 7 months in, I would recommend it to anyone.
First, it helps to provide that post-buying regret. Whether I can actually delay the spending or get better alternatives by proper planning. Next buying would normally be the better ones.
Second, it provides revelation at every cut-off dates (mine is on 25th every month) on how much I actually spend for each categories every month (hint; it will almost always higher than you budget).
There are many apps available in the net which may help to key in every transaction. I don’t know why I cannot stick with any of the apps for a long time in previous attempts and find it easier to jot those down in my scribbling book at every opportunity.
6) Stick to an Envelope System
About the same time, I was also being introduced by Mad to adopt the envelope system. It basically is the process of having the physical money in their separate envelope and I do it this way:
- BLUE envelope : essentials for living (food, my childcare fees, fuel, groceries, and contributions) at around RM1,300 per month. Note that this is the spending which is varied month-in and out.
- RED envelope : all fixed and bills item
- PINK envelope : cyclical fees (car insurance, subscription fees)
After the debt-busting mode, I modified the system. In this mode, the importance is having the BLUE envelope. It provides me with physical indication of how much money left. There are often times, where I realize the money is insufficient towards the end of the month. It may be due to unrealistic budget, which point 5 above may help to mitigate. On those occurrences however, I do whatever necessary to reduce spending. I don’t drive to office, don’t eat at lunch (find the free-lunches in office meetings), don’t eat outside etc. This is the buckling part which I simply NEED to do.
The benefits are tremendous. I am more mindful of my spending plan until end of the month despite the old-school way. You will need somewhere safe to store the money anyway (another alternative is using mobile apps although I doubt the efficiency). You also can use whatever colour as your envelope.
Have your BLUE envelope now.
7) Kiss that CREDIT CARD goodbye, and cut-it.
The main culprits of my debts are due to credit card. I blame this invention for causing me the troubles. As a young working class, it is great having the ability to own everything you crave since childhood at a swipe. To stop the spending, I recommend kissing the card goodbye and cut-it.
I place the two fold of the card on my achievement board and boy it felt free already. The benefit is you would never add to the spending again.
But, you may say;
- How about the points for spending using the credit card?
- Isn’t more rational to use credit card instead for things you have the money for the point accumulation?
- How about travel expenses (claimable) and emergencies?
On credit card points, I just apply for the remaining point rewards (I got a cool free Adidas watch for my exercise use) and don’t bother on next spending points. Those points are for the people who can pay exactly total amount of outstanding payment every month. It’s not for me. Busting that debt is more important.
On travel expenses (claimable) and emergencies; I don’t do any travel if I don’t have that advance fund and don’t budget for any emergencies. This can be a push for me to quickly get the debt away so I can start saving for emergencies.
Bonus Step: Show it to the world
I am not recommending that you stick out your total debt to everybody else, rather to place your end of month debt at visible place in your home. For me and donut, we make it competition-like, where we place the remaining debt month by month on top of the television. As we are both TV freaks back then, it remind us daily that good slashing from previous month, or some setbacks (I won’t lie) as we don’t achieve our targeted killing for the month.
4 months in, we got the hang of the process and enjoys seeing the debt figure goes down and now we can proudly say we are out of debt (bad debt anyway).
Good luck and let me know if this benefits you.