Issue No.55


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Living in a Different Cycle

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Normandy Advisory Services Sdn. Bhd (Licensed Investment Advisor)
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Living in a Different Circle

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The clock ticks on

The good days of the economic boom has lost its race against time. The clock continues to tick on. We look set to be entering the next time phase - period of slump and gloom according to our economic clock. Now that the euphoria of the good times is about to evaporate are you prepared for what will happen next?

As history has shown, with the onset of the slump triggered by a falling stockmarket, comes tight liquidity and reduced spending. Corporate failures will occur as a result of reduced demand, canceled orders, higher lending costs and more credit squeeze. To make it worse, the weakening Ringgit does not help. Salary cuts, no bonus, retrenchments and gloomy times are on the cards.

Prepare yourself

As the problem deepens, you must prepare yourself for the rocky period ahead. It is no surprise if money issues top the list for this yearís new resolutions. What do you do now that your savings has dipped to embarrassingly low levels? The problem deepens. Your once lavish lifestyle has to change - spend wisely, spend within your means and that means limiting the use of your credit cards.

Some may find it hard to adapt to the new environment after having it so good for so long, but sacrifice you must. Donít view the sacrifices you have to make now as deprivation even though it can be very painful at times. The sacrifices you make now will help you prolong your survival through this gloom.

Managing debt

Now that you see the connection between a not-so-small sacrifice and the chance of sailing through the rough seas ahead without getting too seasick, what to do? Given the economic crisis, the common goal for most people will be to reduce debt and expenses. The necessary sacrifices involve cutting down on spending and more saving.

Debt is normally a four-letter word for many people during hard times. It puts a tremendous amount of pressure on everyone. Complacency during the good times has left many investors with massive debt burden ever since things started to turn badly last year.

Consider Zahid an executive, earning around RM5,000 per month who has suddenly lost his job as a result of the economic crisis. He has accumulated a pile of debt with his three credit cards spending lavishly - buying imported items, expensive dining etc. To top it up he has also taken a loan to speculate in the stockmarket. So far he has lost nearly 80% of his capital. He can hardly survive now let alone save anything. What will become of him?

Strategic planning is required. Itís time you be aware of some basics on how to get out of debt. Be realistic in facing the problem. Only you yourself can solve the issue. Make a detailed plan for yourself and put it down in writing so that you will always stick to your plan. Firstly, put down on paper all your outstanding debts and any potential liabilities.

That way you can see clearly the extent of your problem. Next to it list your various sources of income. Ask yourself - Do you have any reserves that you can use? Do you have any assets that you can dispose off to ease your debt burden? Did you consider taking on a part-time job to supplement your income?

Once you have worked out your true net position, list down your basic daily needs. If you are in really bad shape, your basic needs should only comprise of bare necessities. The higher you debt the more sacrifices you need to make. Set aside the amount you have allocated for necessities.

Determine from what you have left which debts that you can payoff first and which ones you donít need. If you are juggling with say, five housing loans having invested in five pieces of property thinking that property prices will rise forever, consider whether it is worth your while to maintain such investments. Reducing your monthly housing loan repayment burden may be a more practical approach right now. Why take on more than what is necessary? Now should not be the time for speculation.

Control your spending. Differentiate between what you want and what you need. Keep close track on your personal budget. Variable expenses such as imported groceries, running the air conditioners full blast 24 hours a day, lavish clothing, entertainment should be reduced as much as possible. If you are a shopaholic, stay away from shopping centers. In order to survive rising inflation, be a comparison shopper for your needs. Check the prices first and make sure you are getting value for your money. Source for cheaper alternatives whenever possible.

Scaling down your luxurious lifestyle could benefit you. Instead of owning a large house or driving an imported car, you can opt for a more affordable option - a medium house and a local car. If you are a die-hard credit-card user, cancel all the accounts as this will force you to stop spending.

What you are doing is simply replacing bad habits with good ones. You sacrifices will pay-off. As things improve, you are likely to become less stressed.

Your plan should be realistic. Donít put down targets which cannot be achieved as you would only be fooling yourself. If you need three years to completely clear your debts, so be it.

Don't drastically cut it down to settlement by year end just because you wish you could settle it by then. While paying-off your debts, avoid incurring further credit whenever possible. As you pay-off smaller debts, do not cheat yourself and compensate by repaying less on your overall debt. Make a serious attempt to pay-off as many bills as you possibly can.