One thing about debt

In our current age, it is quite difficult to buy a large physical asset without debt. Most Malaysians are in debt, be it credit card, housing, personal, vehicle, etc...In fact, with the large increase in credit card penetration, it means that Malaysians are supporting more and more of their lifestyle using credit.

Now, some of you might already be thinking, we have no choice if we want to buy stuff. Ok, but do you know the real significance?

Debt for most people means a monthly payment. In accounting terms, it constitutes something like a "fixed cost", that YOU MUST pay every month. What happens if you don't pay? default and bankruptcy.

It affects everyone. Malaysians have the second highest debt ratio in Asia outside Japan!

Ok, so let's say we already have a certain amount of debt. I'll put in some numbers to help.

Credit Card: RM10000 repayable, 14% interest p.a.

You must understand, that this debt is already incurred, you will have to pay it one day.

Ok, the power mindset is like this: If you have "cost savings", isn't it the same as "money earned" ?

Accountants teach something called "relevant costing", but i'll make it simple. This credit card is making you lose more than 1% per month, in this case, more than RM100 per month!

If you pay off the credit card quickly, you will be losing less per month! The money you earn DOESN'T have to go to credit card debt, it can be used for other things. In other words, you are better off, and are creating an ASSET.

Simply put: Interest saved -> more money in pocket -> more asset!

In accounting, by paying off this debt quickly, you are actually earning 12% of income, because of the interest saved!

So if you have a bit of cash coming in, don't put it in a fixed deposit and earn 4%...pay off your credit cards and "earn" 12%!

Ok, here's a bit on the bigger debt:

Housing loan of 90% value, RM300,000 repayable, 6% p.a.

First off, using the concept of relevant costing, if you pay off your housing loan ASAP, you will be "earning" 6% per annum on the amounts that you pay, due to interest saved!

Use this calculator to check the effect on you!
(Pay attention to the "Interest Paid" amount)

However, there is an even bigger advantage:

At the moment, the loan is for 90% of the house. That means that 10% of the value of the house is owned by you.

Think of your bank as a partner in this asset, who owns 90%. If the value of the house is increasing (and at the moment in Malaysia, it is), you will only be earning 10% of the increase in the value of your property, because you only own 10% of the property!

If you pay off your housing loan faster, you will be able to get a double win!

1) Interest savings of 6% per year! (more cash in pocket, more assets!)

2) a growing % of the increase in value of your property! (more value of property belongs to you, more asset!!)

I hope that this helps you make a proper decision when you have a little bit of cash...paying off debt is usually an attractive option, all things considered.

And you can't put a value, on that all-important PEACE OF MIND.