Contrarian views on Debt and Combat tips of Debt Management

This guide provides contrarian view of debt and gives situation-specific steps to successfully pay off debts.

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You are here because of 2 things:

  1. You are looking forward and learning to manage debt
  2. You are aware that you are in the slow spiral of debt and looking to climb out of it

In either case, it is great that you’re taking this step forward.

This guide is meant for you to understand debt, avoid our mistakes and find out what is important for your success to manage debt. It is put together from our personal experiences, researches and useful techniques to manage debt.

If you have not read our guide to master budgeting, please go through it as it will form the foundation of this debt management guide and determine your success in managing debt.

What is debt and how it matters in the realm of personal finance?

Debt is a sum of money that is borrowed for a certain period of time and is to be returned along with additional amount of money as interest.
Debt is a key tool in personal finance where it is commonly used to buy assets and things that are out of your reach financially.

Besides stating the obvious above, I will highlight this 1 point.

Debt is neither good or bad, despite its negative connotations. It depends on the user and amplifies the impact. 
Just like a knife, it enhances the capability of the wielder. A knife cuts both ways - both the enemy and the user, if poorly used. Those who utilises this tool well will often reach financial success at an accelerated pace while those that mismanage will fall into an abyss. 

How do you then define good or bad debt?

Simply put, good debt is one that is used to generate positive cash flows while bad debt causes you to lose cashflow.

In other words, it does not matter where the debt is from or the type of debt. Debt that helps you generate positive income net of its interest is a good debt. Bad debt is one that is used to purchase assets or things that requires you to pay back cash.

To further narrow the scope of this guide, here we will focus on managing bad debt with the intention mentioned above: to share our lessons and help you jumpstart the process. The reasons for this narrower scope are:

  1. This guide will get too long with its wide scope. Good debt can also be understood as an investment decision which is related to retirement planning, etc. We will dive into these in other guides.
  2. There are tons of resources in making use of good debt. You may check these:
    • Investopedia (Free Cash Flow Analysis is an academic topic that explores this further)
    • CFA (lots of academic resources available)

Climbing out of the abyss – out of bad debts

Debt is like any other trap, easy enough to get into, but hard enough to get out of. Henry Wheeler Shaw
Quote from our Instagram on 26 Apr 2023

Debt is notoriously difficult to climb out of and you would have heard of stories that support this. It, however, is not entirely the fault of the borrower. While the borrowers may have originated the debt, once debt kicks in, there is also a mechanic coined as debt overhang that is working against the borrower.

Debt overhang is generally a term used for corporates but it also applies to individuals. It basically means that all earnings of the borrower is used to pay off existing debt and interest rather than allocating it into opportunities for higher income. This creates a vicious cycle where the borrower is trapped to make consistent debt payments while income is capped due to lack of investments. This results in higher probability of defaulting.

With the above in mind, here are 5 steps in sequence that we think are the most useful to take to get out of the debt spiral.

1. Understanding Your Debt

Start by taking a thorough inventory of all your debts. List each one, including credit cards, student loans, car loans, mortgages, and any other form of debt. Note the interest rate, minimum monthly payment, and outstanding balance for each debt. This will give you a clearer picture of your current financial situation and help you prioritize which debts to tackle first.

Debt NameEffective Interest Rate per annum (%)Min. Monthly PaymentOutstanding Balance
Example of the table

2. Budgeting

As mentioned above, budgeting will be one of the foundation of this guide. Here are the highlighted steps of the budgeting guide relevant for debt management.

  1. Track your income and expenses
  2. Based on information from point 1, create a budget where you reduce expenses and allocate an amount to pay off your debt regularly. The key here is to prioritise paying off the debt if interest rate is higher than investment returns. You should forgo allocating for investments unless you are confident that an investment is capable of providing a return higher than the interest rate – this is rarely the case.
  3. Execute consistently and pay off the debt

The above will feel like going into austerity mode. We understand that it will be a painful and slow process depending on the debt amount but it will pay off (pun intended 🥸) as you progress towards being debt-free. We also find it useful to join a community to discuss and share your progress: Facebook Group/Page.

3. Combat strategies against debt

You might have skipped to this section as this seem to be the crux of the guide. But I would mention that this guide is detailed in sequential steps. Each step is related and important to achieve the overall success. We also recommend reading the earlier sections. You can bookmark and revisit this guide.

In other guides that we have written, we try to provide clear, specific steps to best achieve the outcome. However, due to the different situations (amount/type of debt and number of debt), this guide contains various methods and strategies that will be most effective for you.

We will introduce 4 strategies that we think are most useful in the table below. These are simple and effective techniques, which are also commonly elaborated.

Debt SnowballDebt AvalancheDebt ConsolidationBankruptcy
Key BenefitsPays of smallest debt to build momentum and confidenceOptimize for debt payment efficiency by prioritizing highest interest-bearing debtConsolidates debt to one of lower interest rates and simpler payments. Re-focuses attention into 1 single debt and payment Trump card of debt management where creditors have known and limited access of debt repayment
(usually for last resort and used wisely!)
1List debts from smallest to largest in terms of amountList debts from highest to lowest in terms of interest ratesResearch into institutions or advisors that offer debt consolidationConsult with a bankruptcy attorney or advisor. Determine if important assets are protected from creditors (house, child education fund, etc)
2Make minimum payments on all debts. Allocate maximum possible funds to the smallest debtMake minimum payments on all debts. Allocate extra funds to the highest interest rate debtCompare interest rates and feesDetermine eligibility for bankruptcy

3Pay off the smallest debt completelyPay off the highest interest rate debt completelyApply for a loan or balance transfer
File for bankruptcy with the court
4Roll the payment from the paid-off debt to the next smallest debtRoll the payment from the paid-off debt to the next highest interest rate debtPay off existing debts with the new loan
Receive bankruptcy discharge and begin rebuilding credit
5Repeat steps 3-5 until all debts are paidRepeat steps 3-5 until all debts are paidMake regular payments on the new loan
Debt management techniques

4. Different strokes for different folks

Similar to fighting techniques, each debt management technique will be better suited for you and your situation. We ask these questions below to differentiate and assess the situations. The details in the parentheses are the reason for each question.

  • Have you done budgeting (step 2) for at least 3 months? (If you have done this, it is likely you have discipline to carry through and pay off debts)
  • Do you owe debts from more than 1 creditor? (Applicable for Debt Consolidation)
  • Are the debt creditors official institutions – like banks? (Applicable for Debt Consolidation)
  • Is the total debt more than 6 months of your take-home salary? (Usually required for Debt Consolidation and Bankruptcy)
Debt SnowballDebt AvalancheDebt ConsolidationBankruptcy
Best suited forFolks finding difficult to stick to repayment plansFolks optimizing for lowest debt repayment amountFolks with numerous debts and trying to simplify debt paymentLast resort
Budgeting for 3 monthsNoYesYesWon’t matter
Owe >1 creditorYesWon’t matterYesWon’t matter
Official InstitutionsWon’t matterWon’t matterYesYes
Debts >6 months of salaryYesYes>12 months>12 months

With the table above, you should now identify a best route forward. But before digging into the trenches and start executing, it is important to discuss the next step: Negotiations with creditors.

5. Negotiations with creditors

As alluded above, the last method of last resort: Bankruptcy is best done with an attorney or advisor as they can best evaluate your requirements and provide guidance on your situation. It has powerful negotiation/bargaining powers.

Bankruptcy exposes both assets and liabilities to the court of law and methods of debt repayments are as per the law guidelines. As such, creditors may have lesser options to get back their debts if proper measures are made in place. They will also tend to avoid this due to the legal costs. Having access to it as an option and understanding your value derived from this option are huge advantages, especially in your negotiations with your creditors. Letting the creditors know that this is a possible option for you could even potentially help to reduce interest charged and simplify repayments.

That said, this should be used wisely and you should be prepared to utilize this. Speak to an attorney or advisor and do your due research/diligence before putting this forward.

6. Start repayments

Ideally, after the negotiations with creditors and strategizing, the debt payment format should be simplified and identified where the interest charge is reduced. Now it is time to get started on the actual work.

While not recommended, it is common to sell off assets or things to repay debt. Here we list some steps and guidelines to do this:

Same exercise as step 1: Start by taking a thorough inventory of all your assets and sellable things. List each one, including stocks, properties and any form of asset. Note the estimated rate of return (i.e. how much you can earn from the asset), estimated value, and if it is for your personal use. This will give you a clearer picture of your current financial situation and help you prioritize which asset to sell first.

Asset NameEstimated rate of return (%)Estimated Value ($)Personal Necessity (Y/N)
Example of the table

The key here is to establish an asset sale hierarchy.

  • If your debt interest rate is higher than your asset rate of return, you should sell it
  • If the asset is a personal necessity (house, phone, etc), you can keep the asset. Your own discretion is needed here and to remind: paying off the debt requires sacrifices.
Wealth consists not in having great possession but in having few wants. Epictetus
Quote from our Instagram on 28 Apr 2023


It has been a long read! We established the context of debt management and discussed at lengths on the details of each step. Bookmark this guide if you need to come back to it again.

Becoming debt-free is a life-changing experience, so much so that there is communities established to celebrate this.(find #debtfree on social media platforms). But more importantly, we also learned valuable lessons from our mistakes and got better at managing finances.

We understood the importance of living within means, planning for the future, and being mindful of spending habits. It is a conscious effort to apply these lessons to daily life and maintain a healthy relationship with money.

Discuss the above in our Facebook Group/Page.
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