Taking out loans is a normal part of life. Some take out loans to buy a house, or a car, to sustain their lifestyle and many other things. But is there a better way to manage debts, so we can save monthly repayment and sleep better at night?
Meet Isabela (not her real name), a working mother at a multinational bank in Malaysia. Managing 20 employees as a senior manager while raising seven children was frequently like working two jobs. She was so busy she did not have time to manage her finances.
As a result, Isabela suffered from a negative cash flow of RM5,000 every month, even though she earned a T20 income* as a senior manager in a bank. She constantly asked these same questions over and over: “Why is it that I pay my credit card bill every month on time, but my outstanding debt seems to be getting bigger and bigger?”
So how is it possible that if one pays their credit card on time, they are still in debt?
This is what we found out when we sat down with Isabela. The main contributor to her RM5,000 per month deficit is the ‘Loan Repayment’ row (in the diagram below).
Can you imagine paying RM11,000 per month on your loan repayments? Is there a way to save monthly repayment?
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As I dug deeper, I found four credit cards with multiple instalment plans (refer to Chart 1). “Okay, it’s not too bad,” I thought. I have seen worse, something like 10 to 20 cards.
For Isabela, some of the cards were tied to recurring payment plans. Nothing out of the ordinary but they all had one thing in common: all the cards had outstanding balances.
I started to organise them to understand how much she was paying monthly for each card. Here’s a snapshot, where we found the root cause.
I realised she was paying a fixed amount for some of the cards. I knew she was in trouble because her income couldn’t support the card repayments. She was paying on ‘gut feel’, meaning she would pay an average of RM3,000 per card for three of the four cards.
For example, as shown in Chart 1, she only pays RM3,000 for her CIMB Credit Card. However, the monthly instalments come up to RM2,130, and she was spending RM3,071 in June, totalling to RM5,201. Meaning the payment was short of RM2,201, so she owed her credit card outstanding payments before she started that month.
This is a bad habit and one of the major blind spots for most credit card users as they don’t clear their monthly balance. Here’s what I have to advise:
First, although you pay your cards on time every time, you still need to pay the amount spent in full for that month or else the outstanding will grow out of proportion. You cannot just pay on time without paying in full for what you need to pay.
Secondly, when you miss paying in full for one month (that means having an outstanding balance for the following month), it would be very hard to keep track of your expenses. It becomes impossible to reconcile what you spend the subsequent months unless you sit down and take a snapshot of your expenses over three months of credit card spending.
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When you don’t know what you have been spending, you won’t know how much you have to pay. And this will go on like running on a treadmill that won’t stop and will keep going faster until you fall.
Thirdly, most people who constantly pay off any outstanding monthly credit card expenses will not have this problem.
So how can we save monthly repayment and solve this issue?
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Case Study On How To Save Monthly Repayment
Once we identify the problem, we can develop solutions and strategies. In Isabela’s case, here’s what we needed to do to save monthly repayment:
1) Restructure her debt and consolidate it into one unifying loan.
2) Manage her expenses through ICE JAR, the world’s simplest money management system, to prevent her from falling into the same situation in the future.
Although she has a housing loan that we can use to consolidate her credit card debts, there wasn’t much capital appreciation as these properties were purchased recently.
So, we had to use another ‘container’ to consolidate her loan. The most effective ‘container’ is similar to a housing loan that uses a ‘reducing balance interest’ calculation instead of a ‘fixed line interest’ calculation loan (also known as a personal loan) that most people use.
Within a month, my team and I managed to help Isabela find her ‘container’ and save monthly repayment by reducing her loan repayment from RM11,648 to just RM2,594 monthly.
Many of our fellow Malaysians are unaware of a significant difference in interest calculation.
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The ‘fixed line interest’ calculation (typically used for traditional car loans and personal loans) is very different from the ‘reducing balance interest’ calculation (typically used for housing loans). Let me illustrate by using this example of taking an RM100,000 loan with a 5% interest rate over ten years.
From the diagram illustrating Isabela’s Debt Consolidation Strategy (DCS), you can clearly see why I chose to use the ‘reducing balance interest’ option. Given the same loan amount, interest rate and same 10-year duration, and a monthly instalment of RM1,250, you can see that the ‘reducing balance interest’ calculation gives 50% interest savings compared to the ‘fixed line interest’ calculation.
This is how you can save monthly repayment and sleep better at night.
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This is the reason we need to invest in our financial education. As they say: “Education lifts us past poverty,” and that especially includes financial education, and save monthly repayment is something that almost everyone needs to know how to do it.
*T20 income is classified by the Household Income & Basic Amenities Survey Report 2019 by the Department of Statistics Malaysia (DOSM). The income classifications for T20 have been revised to reflect inflation, the rising cost of living, and household size, among a host of other factors, into two parts:
- T20 Part 1 – RM 10,961 to 15,039 and
- T20 Part 2 – RM 15,040 and above
About the Author
Ng Ka Hoe is a Licensed Financial Planner and a Financial Adviser Representative (FAR) with Bank Negara Malaysia and“Capital Market Service Representative License (CMSRL) Financial Planner with Securities Commission Malaysia. He is also the Founder of J Advisory, a Personal Finance Academy that helps struggling Malaysians elevate their financial well-being with proven tools, systems and strategies. For more real-world case studies, you can head over to https://jadvisory.asia/.
