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Successful Debt Management for a Better Financial Future

Writer's picture: MICRAMICRA

How to successfully manage debt with the right steps for a better financial future

Writer Annisa Rahmah, MICRA Program Assistant

Editor Regita M. Rusli, MICRA Program Development & Alternatives Manager

 

With the proper steps, you can help yourself get out of debt and start planning for a better financial future. Having debt is not always a bad thing; if managed well, it can be a tool that helps you achieve your financial goals, such as buying a house, starting a business, or furthering your education. However, without proper management, debt can become a burden that interferes with financial well-being.


Properly managing debt is an important aspect of personal finance. Without the right plan, debt can quickly become unmanageable and affect your life, not only your financial stability but also your mental and emotional well-being.


Definition of Debt Management

Debt management is the process of managing loans, installments, or credit to keep them under control. The goal is to ensure that you can meet payment obligations without sacrificing other essential needs. This process involves managing expenses, planning payments, and controlling the amount of debt incurred. Before we proceed, let's first understand the types of debt.

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Types of Debt
  1. Productive Debt

    Debt used for purposes that generate economic value, such as loans for education, business, or property investment.


  2. Consumptive Debt

    Debt that is used for daily consumption, such as luxury shopping or holidays. This type of debt does not provide long-term benefits.


Steps to Manage Debt

Manage debt wisely requires the right strategy so that it does not become a burden in your daily life. With effective steps, you can control debt in a planned manner. The following are effective steps in debt management:


  1. Identification Your Debt The first step to managing debt is to know the total amount of debt you have. This includes debts such as: 1) Bank loans; 2) Credit Cards; 3) Online Loans; and 4) Personal Loans/other parties. By understanding this, you can make a more focused plan.

  2. Put Debt Repayment as Priority Once you know how much you owe, the next step is to prioritize your payments. Decide which debts to settle first. Use strategies such as:

    a) Snowball Method: Start paying off debts from the smallest to the largest.

    b) Avalanche Method: Focus on the debt with the highest interest rate first.

  3. Create Financial Budget Develop a monthly budget to ensure that debt repayment is prioritised. Cut non-essential expenses to increase the allocation for debt repayment.

  4. Avaoid New Debt

    As much as possible, avoid taking on additional debt before settling existing debts.

  5. Negotiation with Creditor

    If you find it difficult to pay, do not hesitate to contact your creditors. You can ask for debt restructuring, such as an extension of payment time or a reduction in interest. This is a common practice and the creditor will help you with the process.


Things to Avoid in Managing Debt
  • Ignoring the Due Date: Late payment of debts can increase the cost of penalties and lower credit scores.

  • Paying Only the Minimum: Paying only the minimum amount of debt instalments makes the payment duration longer and increases the total interest paid.

  • Using Debt to Cover Other Debt: This can lead to a cycle of debt that is difficult to overcome.


Tips to Avoid Excessive Debt
  1. Live within Your Means: Spend money according to your income by considering needs and wants.

  2. Have Emergency Savings: Set aside money for your emergency fund to avoid going into debt when faced with unexpected situations.

  3. Understand the Debt Contract: Read and understand the terms of the loan before agreeing to consider your financial budget in the long term.


Conclusion

By managing your debt wisely, you can achieve your financial goals without being burdened by excessive debt pressure. Start by making a payment plan, be disciplined in your spending, and avoid unnecessary consumptive debt. Remember, debt is a tool, not a burden, if used wisely.


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