Sunday, 16 August 2009

Get out of Debt 1 : Urgent! Start Now to Save Your Life

With the current source available for money management method, we can easily get overwhelm with the information. My friends always asked me, where to start first? What is the priority to straighten up our money? I got some tips on that which I felt the most practical since I swore by it myself. My resource is from Suze Orman through website. Here are her tips on how to start our action plan to handle our financial lifestyle.

1) Get ready your 8 month emergency saving first
Consider this as your emergency fund. In order to be at the safest state, you need minimally 8 months saving of your monthly spending. Calculate how much does it need for you to live for a month then prepare 8 times of that amount.

In time of recession like current days, it is crucial to have as much emergency saving as possible. We never know what to expect on the next day. Having 8 months saving, in case of emergency such as losing our work, we can still survive for another 8 months, giving us more than enough time to find other job.

2) Pay off your credit card
This is important, but in time of recession, priority must be put to handle your emergency saving first. However, in order not to affect your financial rating, please ensure that you pay all credit cards to 5% minimum only. The rest of the money still needs to be set aside for the emergency savings. Rules of thumb, stop using your card and never take cash advance.

3) Raise your FICO score or credit rating
FICO score is crucially important for US resident because it effect on how everybody (bank, landlord and even employer) look at how your money handling skill. Low FICO score will give bank the opportunity to charge you with higher interest rate and to reduce your spending limit.

For Malaysia, we do not have FICO score. Instead, we have Credit Report that maintains by Central Credit Reference information System (CCRIS). Similar to FICO scoring, Credit Report show to bank how good we handle money thus allowing them to decide either to approve or disapprove of loan application.

Tips to raise your score are:

  • Pay all your credit card bills and loans on time before due date. For credit card, minimally pay up the 5% minimum payment.
  • Never overcharge your credit cards.

For US resident, FICO score will be affected if your cancel of credit card. Please do not cancel your card even after you finish paying the card. On hold to this process until your FICO score is above 700.

For Malaysian, having minimum credit will improve your credit rating. So, go on and terminate your credit cards and ask bank to convert your outstanding balance to term loan. Ensuring prompt payment to the term loan will further improve your credit rating.

4) Create a Spending Action Plan
Budget tracking is a must in order to trace your spending habit. You may check all my previous post under “Tame My Budget” (check my sidebar for my achieved post to get some of my personal tips on how to start doing your budget).

If you noticed that your spending is already head over heel, here are some tips for you to recognize your unnecessary spending:
  • List down all your expenses and separate them into categories “NEEDS” and “WANTS”. You have to be honest with yourself on this to correctly separate each expenses to the correct categories
  • Circle all the expenses that are “WANTS
  • Until you have your 8 months saving and you have clear off your credit cards, immediately eliminate all the “WANTS”. Do not worry, once you life is back on track, you can introduce back the “WANTS” in a more control manner into your life.

5) Create a Retirement Action Plan
Do you know how much you need in order to live your retirement years? Give it a simple calculation so that you can see your goal clearer. Understand how much money you are going to need to survive for a month after retires. Then multiply that by 12 months and multiply again by how many years you expect that you want to life comfortably after retire. That is how much money you will need.

Then write down your action plan on how to get that money by time you retire. Simulate the number to make sure that you can achieve the number by the time you retire. For example, here is my retirement plan:
  • I need $750,000 by the time I retire so that I can live comfortably about $2,500 per month for the next 25 years after retire.
  • My KWSP should be able to support around $150,000 for that (Malaysia retirement scheme similar to 401(k) or IRA in US)
  • Always put 10% of my current salary every month to ASB (a low risk unit trust in Malaysia) and target to fill up to the maximum allowable purchase of $200,000. The yearly 8% dividend from ASB will be put aside for my emergency savings.
  • Consolidate my debt and push of 40% of my salary for dept management plan. It will take 3 years for me to clear off all my debt.
  • After debt cleared, push 50% of my salary to ASB.
  • Once my ASB fill up to the maximum, take the 50% of my salary and fill up ASW2020 (another Malaysia unit trust with 7% yearly dividend)
  • Once ASW2020 are filled up, start investing in gold to support my money growth in fight against inflation.
  • As a backup to this entire plan, I have an investment-linked life insurance with premium that minimally can pay up all my current debt if something goes wrong.

Once all these are done, at least you can sit in comfort that your life is back on track and very well managed….for now.


Jennifer said...

I used ”Credit Solution” to settle my debt and avoid bankruptcy. They managed to reduce my debt up to 58% and improve my credit score. It's legitimate . I came across this company on NBC News Special Edition. Check it out here:


nie excellent article, very constructive to the fore ......!!!!!!! thanks for all the added forward and hopefully better yet ...!!!!!

Anonymous said...

thanks for the tips really need to discipline myself

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