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Hello ,

Gong Xi Fa Cai! Wishing you and family a blessed, prosperous and joyous Year of the Ox.

For many people, one common New Year resolution is to get their financial health in greater shape than the previous years. If you have this resolution and haven’t done much work towards the goal, you now have a second chance to get things going since we just celebrated the new lunar year. Unless you like to wait until the Iranian new year, Nowruz, which falls on 20 March 2021.

In today’s world, most people consider it ‘normal’ to have debts. Statistically speaking, in Malaysia the household credit stands at 87.5% of the GDP in 2020. In Thailand, it is 86.6% of the GDP in Q3 2020. Some people classify debts as either ‘good’ or ‘bad’, depending on whether it appreciates (education) or depreciates (car) in value over time.

Let’s pause a little. Irrespective of the category, we can perhaps agree that some of us have a lot of debt. More than we need, and it doesn’t feel good. At least it didn't feel good for me once upon a time when I was heavily in debt.

Despite knowing what’s good and not good for us (there a lot of information about it all around us), there are still people out there who are highly in debt while continuing to swipe random purchases on Lazada/Shopee on their credit cards.

Why? It boils down to psychology.

Dr. Brad Klontz coined the term “invisible money scripts” to explain “typically unconscious, trans-generational belief about money” that are developed in childhood and drive our behavior today.

These beliefs are powerful, and the earlier we recognize them, the faster we would be able to get our financial health in order.

Let’s explore some of these invisible money scripts:

“It’s not so bad. Everyone has credit card debt. At least I don’t have as much debt as Steven.”

What it means: Humans are wired to compare themselves to others. Interestingly, the worse situation we're in, the more we look for others to reassure us that we're not really that bad. It doesn't change our situation, but we feel better about ourselves

“I probably shouldn’t buy this, but this is the best deal I see online on 11.11. It’s only $99.99 after all.”

What it means: Once the problem is sufficiently large, we rationalize any single change as "not enough" (when in reality, real change happens through small, consistent steps). There are lots of similarities here between the decision making of those in serious debt and those who are overweight.

“I don’t even know how much I owe...but it can't be all that much. So what if I take on a little bit more debt...”

What it means: It is estimated that over 75% of people in debt do not know how much they actually owe. The truth would be too painful, so they ignore it. But there is power in acknowledging the problem and making a plan to fix it.

Let’s tackle this monster in 5 Steps*

Paying down as fast as possible will give you more freedom to invest or save for purchases or activities that would bring joy to you. With debts hanging over your head, the goal of living a Rich Life that I alluded to in the last post, will be difficult to achieve.  

1. Know how much you owe. You will be surprised that many people don’t take this step and keep paying their debts blindly without a plan. A journey of a thousand miles starts with a single step, as the Chinese proverb says. This is the crucial first step in any debt rehab program. You can’t make a plan to pay off your debt if you don’t know how much you owe to begin with. It is painful to know the truth (I feel you), but it’s better to bite the bullet now. Simply list out all your debts into a simple spreadsheet.



2. Decide which debt to pay off first. Now that you know how much you owe, it’s time to plan out how to tackle them. There are two schools of thought on this matter. Dave Ramsey champions the snowball method. In this method, you pay more towards the debt with the lowest balance, in order to get it out of the way. This is all about psychology and achieving small wins early on. It will keep you motivated to tackle the other debts.

Another method tackles the debt with the highest rate first. Mathematically, it is more efficient and cost effective because you get to settle the most expensive debt and gradually pay down the rest of the debts.

Don’t spend too much time debating the merits of the two approaches. Don’t get sucked in analysis paralysis. Just pick one and stick with it. You might save or pay more depending on the approach you take. Key is to just do it.

3. Negotiate the fees and/or rates. As an Asian, I believe you can haggle pretty much anything. Including the rates you pay to the banks. There are 50-50 odds when you call the bank to lower the rate. And if the upside is large (in this case to get out of debt sooner), it is worthwhile to give it a shot. What’s the downside anyway?

You can either call or write in a letter to request a lower rate. I have done both. I called the credit card company to waive the annual fees. I know it’s not exactly lowering the rate, but it felt like a big win.  

I have also written to the bank to reduce my mortgage rate. Seeing that I’ve been a good paymaster, they agreed to reduce the rate.

You can take advantage of the various relief programs that banks are rolling out to help their customers sail through the economic recession brought about by Covid-19. If you have been a (good) customer with the bank or credit card company for a while, they would rather waive some fees or lower the loan’s rate, rather than losing you altogether. Plus, keeping an existing customer is always cheaper than acquiring a new one.  

4. Determine where the money to pay off your debt will come from. This can be tricky especially when you feel like you're barely keeping it together when it comes to paying your bills at the moment. Should you do a balance transfer? Take out personal loans? Some options are better than others, but don’t let these questions stop you.

1. Balance transfer: At the outset, this is an attractive option. Transfer your large balances from one card to another with lower or zero APR, for a limited period. This seems like a Band-Aid solution for a larger problem i.e. hard-to-control spending behavior. The rate will always go up after the promotional period. You also need to keep track of an additional credit card account on top of your existing one. I have done it and it is rather a complex endeavor (mentally exhausting) to juggle the various payment due dates. 
2. Taking a personal loan or refinance your house:  I cringe with these two options. Your goal is to have a simple enough plan to pay down your debt, not to add more complexity, even if it costs more. It goes back to psychology. Folks with debt issues typically have difficulty lowering down spending and potentially go back into debt once they tap into other loans or mortgage refinancing. Plus, there is a possibility that you may lose your house if you run into more debt.
3. Reducing your spending and paying down debt aggressively. This is the most boring and the least sexy method to pay off your debts. This may not be the most interesting thing to share with your neighbors, friends or folks on Clubhouse, but it works.

Develop a Conscious Spending plan (like I talked about in the last post) to ruthlessly cut down on unnecessary spending so that you can channel your new found money towards paying down your debts. You will be surprised. In the beginning, it may seem like agony. You will sigh with relief as you see your debts balances becoming smaller and smaller as the months pass by. Slow and steady wins the race.

5. Just get started. Today. Set aside some time to take stock of your outstanding debts to know your situation. Prioritize which debt to pay off first, negotiate the rates with your banks, determine how to pay it and get on with it. If you’re taking a long time (more than 2 weeks I’d say), then you’re overthinking it. There is no perfect plan. Take action today and tweak your plan as you go along.  

There is light at the end of the tunnel

Being in debt often means giving up on life choices. You might stay in a job you dislike just because it ‘pays’ the bills. You can’t take vacation or have a decent savings account. Worse, it can lead to stress, depression and anxiety.

Staring at your bills and other debts can be paralyzing. It is tempting to feel that there is nothing you can do to resolve it.  

Cut the negative invisible scripts in your head. There are steps you can take today to get you on the right track to pay down your debts. The sooner you take action, the sooner you are on your way to living a Rich Life as defined by you.

Be great,

Reez Nordin

*Adapted from Ramit Sethi's book entitled "I Will Teach You To Be Rich"

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