"Debt" has always been viewed with negativity. When we think about debts, we think of compulsive gamblers who just can't stop losing, bad businessmen declaring bankruptcy, or loan sharks spraying paint over people's house. But, it is not without reason. Owing money to people is naturally a bad thing because you are in some ways under their control. However, there is such thing as good debt and bad debt.
Good debts are taken on as investments, whether in yourself or in a business. For example, businesses take on debt all the time from banks or the public by issuing bonds and they take this money to expand their factories or improve productivity. This will in turn make them more money compared to if they had just slowly saved up from their profits.
Another more relatable good debt is education loans like your PTPTN loan. When you borrow money for education, usually to attend college or university, you are investing in yourself by gaining better skills and qualifications to obtain better job opportunities. What makes education loans worth it is that they are usually paid over a long duration of time with very minimal interest rates.
On the other hand, bad debts are debts that will just continue to grow and grow like pests unless you get rid of them quick. Debts with high interest rates are a sign of bad debts. Credit card debts are one of, if not the biggest reason many people get stuck in a pit of debt forever. If you don't pay off your cards fully, the debt accrues interest, and that interest accrues even more interest. It's a never ending debt cycle!
Now that we know more about the types of debts, how do we actually get rid of it? Here are 2 of the most popular methods given by financial writers:
Snowball Method:
1. List your debts from smallest to largest (not including interest rate).
2. Make minimum payments for each one except the smallest.
3. Pay as much as you can every month on the smallest debt.
4. When the smallest is paid in full, repeat the steps.
The snowball method is a good way to get you started as your goal is to always only clear off the smallest amount of debt. Once you start gaining momentum, and as your income hopefully gets higher and higher, paying off the successively larger debts will seem as easy as the smallest one.
Avalanche Method
1. List your debts from highest interest rates to lowest interest rate,
2. Make minimum payments for each one except the highest interest debt.
3. Pay as much as you can every month on the highest interest debt.
4. When the highest interest debt is paid in full, repeat the steps.
The avalanche method will appeal better to your inner mathematician as the goal is to pay the least amount of interest (debt's army). This is because interest accrues every month so the earlier you pay of a high interest debt, the lesser time it has to grow its "army of interests".
Snowball vs Avalanche
There is no saying which method is better than the other as both has their own pros and cons. The snowball method provides you smaller stepping stones to gain momentum while the avalanche method saves you more money in the long run. The most important thing here is to choose one and stick to it, that way you at least made the most important choice - starting.
So, we hope this article will help you work towards a debt-free life. Once you've cleared off your debts, you can begin to strive for more financial freedom. If you think you require more professional help, Malaysia has set up a Credit Counselling and Debt Management Agency (AKPK). Remember, you're never alone in this fight against bad debt!
(READ: 5 Ways To Start Your Journey To Financial Freedom)
*We are by no means certified financial planners and this article should be taken as knowledge sharing and not official financial advice.
