Usually I promote credit cards as if they’re the cure for cancer.
But in reality, I know a lot of people get into huge debts because of credit cards. They’re definitely not for people without financial discipline.
So here’s a cautionary tale from the other side: How my friend ended up in RM 60,000 debt and the drastic steps he took to get out of it. This is Ilham’s story, told in his own words:
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It’s painful being in insurmountable debt. But, having been there and gone through it – I realize now that it was a good thing. For me. It enabled me to become a more responsible man to my family, and the permanent changes it caused in me were essential for my growth.
How did I get into a mountain of debt?
Years of living mindlessly – which not only took a toll on my soul, but vicariously ruined my personal finances too.
The chief reason?
The wonderful human invention called credit cards.
I grew up having to share things (if we had any) with my other 6 siblings. Fresh into the working world in 2010, I became a hungry ghost seeking pleasure in material possessions. Naively, I thought; a sporty car with sleek 16” rims would make me happy. Coupled with my ferocious goal setting attributes, I set out to get everything that I wanted, compiling them in a sacred list called “IIW” – Items I Want (Cute eh?). And I got all of them at the expense of being deep in debt.
It was only when I needed to get married that I realized the terrible truth: Not only did I have no savings, but my impulsive spending habits had set my net worth to be negative 60K!
At this point, I had a sinking realization that paying a little bit higher than the minimum payment to credit cards wouldn’t do it. And I would probably be doing that for the rest of my life (with credit cards interest at a high 17%). It was going to cost me countless investment opportunities along the way too.
The total duration from realizing how screwed I was to finally saying Goodbye to the banks was 25 slow and painful months. But the sense of achievement I got was beyond me. It became the inspiration for the first post on my blog, and with that, opened myself to opportunities I would have never imagined.
These are the total debts I had prior to my redemption:
- AEON Credit for Macbook : RM 3,000
- Maybank Visa Credit Card : RM 28,000
- Personal Loan (3 years) : RM 30,000
The short answer of how I did it?
Scrape more money from my salary to pay the debts while reducing my expenses significantly.
The long answer? Here are 7 things I did:
1. Know the WHY
Knowing Why is paramount in every endeavor. Being newlywed, the pressure to provide and having to feed another person made me realize that I needed to get my act together. I wanted to provide a stable base for my daughter. She deserved to grow up in a good environment.
Moreover, I realized that I needed to start dabbling into investment, be it properties or stocks. I wanted to invest so I could fund more experiences, as well as reduce money-related anxiety. But having gigantic debts effectively ruined my chance to get a housing loan, and affected my motivation to save capital. How could I save, when my normal end-of-months were just survivor tales of barely making ends meet?
I attached my Why to grand visions of rewards (well-being of daughter, more freedom). When I was clear with my Why, it provided the pull factor and added edge to strengthen my resolve. If you’re about to tackle a project as big as “Slashing 60K Debt”, then my first advice is to know your Why. The best Whys are emotional and preloaded with vivid visions of how things should unfold when you have it in the future. Write it in your journal and let it be the beacon of light and hope in your journey.
2. Envelope Budgeting
The problem with budgeting, and why people don’t bother to budget at all, is due to unrealistic budgets when they first do it. I experienced it myself a few months into the process…
I always burst the budget (especially in what I called Pure Impulse spending). There’s always fancier shirts and skinny pants to buy!
To combat this, I called upon wisdom from the ancient financial technique called “Envelope Budgeting”. Here’s the simplified overview:
- Withdraw all your money from the bank, every payday. All of it.
- Segregate the money into pre-specified amounts in different envelopes (Utilities, Essentials, Pure Impulse, Growth, Savings, Aafiya – that’s the envelope for my daughter, btw)
- Only take out the money when you intend to do the transaction e.g. I need to refuel my car today, so in the morning I take out RM 50 from my Essentials envelope.
Simple, eh? Well not really so. Some common questions people ask:
1. Why should you be doing such a complicated technique, envelope and all?
Well because I’m in such deep shit, and tough times call for tough measures.
2. Can’t you just leave it in the bank and record somewhere if you have / haven’t burst the budget allocated yet?
Yes, you can. But it didn’t work for me that way. I suspect envelope budgeting worked for me, because the act of taking out money from the envelope and seeing the money slowly vanishing, forced me to be more mindful of my purchases. It strengthened my resolve to be thrifty.
3. Is it safe?
It depends. I stashed my cash in my drawer and didn’t tell other people about it. It was safe for me as long as I did this. Caution: This might be different in your neighborhood.
4. When the envelope is zero, what do you do?
I did what a lot of other people would do, I cried!
But it surely was a tense, self-imposed situation. If you’re stressed, then the envelopes are doing their job. I often needed to shuffle the money from other envelopes (Growth and Cyclical would almost always be the victims), and then pay it back during the following month. Or just let go of the books that I’d been craving. Stress is also an indication that you’re either living way beyond your means, or not putting in realistic money in respective envelopes in the first place.
Try it for a few months and see your personal finances wrestled back into your control.
This is hard work. I understand if you haven’t done this before, it will feel like a chore. But after 5 years doing it — I cannot envision my finances without knowing where the money goes. It provides feedback for how well you’re doing so you can continuously tweak. Numbers don’t lie — so there will be very little room for rationalizations and assumptions.
The biggest takeaway from my earlier tracking days was that I was spending as high as RM 300 per month on cigarettes. Seeing the numbers and knowing that it could otherwise be used to reduce my time in debts led me to try to stop smoking. I finally managed to stop permanently, albeit with a few lapses.
I did tracking the old school way, writing the expenses daily into my journal and consolidating it manually every month-end. It did feel like a chore, but a few months in, I liked it because I knew exactly where my money went. Do it for a full year, and you get the nuances of cyclical and emergency spending which would definitely be missed if you just guessed.
It was only in 2014 that I found a good app for this essential activity. I rave about it to everyone I meet now because of its clean and minimalist design. Hail Spending Tracker!
Envelopes for spending, not cards
4. Enlist the Police
I’m fortunate as I happened to be around friends who are very strict in their finances. Spending time with them, I couldn’t help but get influenced by their thrifty attitudes. Two of my stand-out friends deserve an honorary mention here:
The one who introduced the envelope system to me. He would scratch his head over whether to buy a pair of shorts or not for his upcoming travels – 6 months in the future!
The most meticulous and detailed person I have ever had the pleasure of knowing. He would spend months comparing his Excel files on purchases that he was going to make. Talk about value freaks!
Although I’m never going to emulate them to the T, having good examples in how you should conduct your spending is important. Remember the saying: “You are the average of your 5 friends”.
To step up your game even further, enlist them as your police.
What I did was, prior to every purchase (especially major ones), I would inform them and be answerable to whether I had the funds to pay for it later. This might be difficult for people with big egos, especially since you need to open up and tell others you need help. Luckily, I didn’t worry about pride, as the insights I got from them were super helpful. I ended up usually postponing my purchases, and even when I did buy, it was because I had a solid plan to pay.
5. Kiss those Credit Cards Goodbye
I’m a huge believer that you can’t get out of big debts without dumping your credit cards.
I still vividly remember how I resolved to (or at least started to) end the misery by cutting my credit cards in two and putting them on my vision board — the way ancient warriors put their fallen enemies’ skulls in their living rooms. It symbolized the triumph I achieved over wanting things impulsively.
I highly suggest that if you have big debts, stop swiping altogether. Stop thinking of fancy Treat Points which are reserved for people with good finances. Stop extending your debt deeper as credit cards can provide a false sense of feeling that you have the money. Go 100% cash or online banking for utility fees. Of course there’ll be some inconveniences, such as traveling with too much cash or miscalculating funds, but another wrong move with your plastics could spell disaster.
I would think of this as the “exorcising your past demons” period which you just need to endure. Think of the better future as a result of your suffering.
6. Stick it in Clear Sight
They say, “Out of Sight, Out of Mind”. So don’t let anything dilute your resolve to kill the debt. Keep it constantly visible.
What I did was put up a table of my debts above my TV (back in the days when I used to watch TV). This way, there would never be a day when I was not reminded of how much debt I still owed. I believe it unconsciously made me more creative to earn more money and reduce spending. It led to funny moments too when I had guests staring at my debts, when I forgot to remove the sheet.
7. Earn More, Spend Less
Whether you’re self-employed or employed in a huge corporation, the simple mantra to sane personal finance is good ol’ “spend less than you earn” or “live within your means”.
In my pursuit of cutting debt, I strived in several ways to increase my income. I worked for a promotion for higher salary (and 100% of that increase was channeled to debt busting or savings), went for allowance-based assignments (the place I work pays allowances for offshore trips) and sold old stuff I no longer used.
Spending less, on the other hand is natural once the numbers appear every month-end upon doing your tracking. You realize that spending RM 300 on smoking makes no sense. Or that you’re spending too much for lunch outside. It might be better to eat at the subsidized office cafe instead. These sorts of tweaks can only happen once we track the numbers, followed by near-obsession to minimizing petty spending.
This post could easily be titled: “How to improve your personal finances” and it would feature the same advice. I believe getting out of huge debt requires an overhaul of the way you spend and manage money.
It’s the previous set of habits that led you to this deep shit in the first place, so until you change the way you manage your finances, it will be a long road to redemption.
Lastly, if you’re in the same boat as I was 4 years ago; don’t fret, this is the chance to propel to a different you and it starts with these simple steps.
On to better personal finance.
A truncated version of this post first appeared at iMoney
Ilhan (or Ilhan Mansiz – an ode to Turkey’s footballing hero) sees the world as a series of projects. He swallowed the red pill, and is on his way to completing the biggest project he ever embarked on: “Project Freedom”. Find out what it is and how he intends to do it here
Pic at Pixabay
I recently quit smoking and boy do I have more cash to play with!
Wow. Congratulations Sukhbir — keep up the good work!
Really interesting read!
Good article ! I used my credit cards as if they’re debit cards and actually earn money from it/gained benefit from using them. eg points which can be converted to vouchers and cash rebates. It worth to note that, taking personal loan, balance transfer to pay off the credit cards debt can also help, since the interest will be lower …
Glad to hear you’re fully utilizing your cards! And yes — with the correct knowledge and discipline, balance transfers and personal loans can help clear up credit card debt.
thanks for this article. it really inspired me to pay my loan asap. keep on writing!
Thank you Noor Fadzilah. Hope you’ll be back for more 😉
Thanks for the articles, once i finish my easy installment i definitely will cut my credit card!!! actually the points doesn’t help much but most of the ppl think of earning point to redeem but at the end the interest you pay for the debts show that the point you earned is doesn’t worth for it. especially most of the credit card user love to pay minimum payment. I can confirm a lot do this, because i used to be one of them. i learn a lesson
Thanks Gabby. Happy to hear that you’re doing much better financially now!
Credit cards need A LOT of discipline to manage well really.
Thanks for the article. Served as great inspiration.
Thanks Tommy — hope you’ll come back for more!