At some points in your life, you will encounter debts. It could be from an education loan, car loan, personal loan or other types of loan. Normal debts can turn into ugly bad debts when you are unable to repay them consistently or if you continue to rake-in continuously new debts every month. When you are swamped with debts, you may unavoidably start to worry on how to tackle your debt problem.

To understand how you got yourself into the mess and how to stay bad debt free, apply the 8 principles below for a complete financial makeover.

1st Principle: Pay yourself first

I am sure you have heard this before as this never fails to work miracles on a person’s long term financial standing. When we work hard at our jobs, it is to earn money to support ourselves and our families. It makes sense to pay ourselves first before we pay others. Doing this consistently every month ensures that we have a savings fund to rely on during emergencies and also for retirement.

2nd Principle: Cut down on your expenses

Do you ever face the following situation:

  • Not having enough money at the end of the month and
  • The next pay day seems so far away

The above situations are actually indications that you have used up all your disposable income before the month end. If you don’t track your expenditures then you may be over-spending. The answer is to budget or cut down on your expenses. You may have a habit of spending excessively in certain areas like on entertainment, on shopping or on dining out. Once you have pinpoint the problem areas, cut down or limit your spending in these areas.

3rd Principle: Practice delayed gratification

To practice delayed gratification helps you to make the correct buying decision instead of buying impulsively. When you postpone to purchase an item, it gives you time to evaluate whether you really need the item or not. After some period of time, you may realize that you don’t need the item at all and can do without it.

Practice delayed gratification and you will find that you do save money and prevent debts especially when you apply it to big purchases like electrical appliances, a travel holiday, an expensive dress, an expensive dinner, etc.

4th Principle: Work out a positive cash flow

To know whether you have positive cash flow means you have to track both your incoming cash flow and outgoing cash flow.

  • Incoming cash flow can be your monthly salary, your bonus, interest or dividends earned, rental income, etc.
  • Outgoing cash flow are your expenses such as on food, transportation, loans, bills, medical expenses, etc.

If your cash flow is negative that means your outgoing cash flow is higher than your incoming cash flow. If you continue in this pattern then you will incur continuous debt. To work out a positive cash flow, make a budget, cut back on unnecessary expenses or practice delayed gratification. It is wise to ensure that you have a positive cash flow before you start to spend or else the end result is debt accumulation.

5th Principle: Earn more than you spend

A continuation from above, one way to have positive cash flow is to earn more than you spend. After going through steps 1 – 4 above and you find that the debts are still piling-up then maybe your current income is not enough. You have already cut down on unnecessary expenses and you have stopped buying things on impulse and yet you find that the money is not enough. Therefore, it is time to find ways to boost-up your income to stay away from accumulating debt.

6th Principle: Understand the interest charges

When you take out a car hire-purchase loan, a housing loan or when you use your credit cards, you must know that you will be paying extra amount of money to cover the interest charges.

For those who want to stay ahead in the long term will educate themselves and find ways to reduce the amount paid up towards interest charges. For example, they may put extra efforts to find which banking institution offers the best home loan whereby they do not pay excessively in interest charges. This action alone will save them thousands of hard-earned money.

On the flip side, you want to earn high interest rates on your savings fund. Getting a return of 4% from your FD is depressing compared to ~10% return from your Unit Trust investments. Therefore it pays to be knowledgeable in this matter to be on the winning side.

7th Principle: Snowballing effect of loan repayment

There are lots of incentives and tricks offered to you to take up loans. If you are not careful, you may find yourself repaying loan debts more than you can handle. Combine with the several handy credit cards you continuously use, sooner or later you will find that you have fallen into the debt trap.

When you have loan debts to repay, it takes up your money reserves meant for your savings or investment fund. Eventually you will realize that not only it affects your current money cash flow, it also affects your future savings plan. Therefore, don’t get caught into this quicksand of perpetual loan repayment.

8th Principle: Plot your net worth

Just as an organization would carry out an audit from time to time to find out its overall performance, it is also recommended that you should do your own personal net worth calculation to keep track of your financial standing. A simple and straightforward calculation is shown below:

Total assets – Total liabilities = Net worth

Total assets: Combine all your money from your savings or checking account, trust funds, property value, car value, stock value, etc.
Total liabilities: Combine all your debts such as home mortgage, credit card balance, etc.

Your goal is to have a positive net worth value at all times and it should be increasing as time goes by.

Refer KCLau’s previous article about this technique:Financial Intelligence Test

So there you have it, all the 8 principles to live by to stay bad debt free. If you follow them conscientiously, you will be in the financially stable group who takes responsibility for their financial future. Make sure you are one of them.

This article is shared by Jacquelyn Wong, who authored the Secrets to Writing an Ebook in Three Easy Steps.

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