To get financial stability, you need to make sure that your expenses are less than your income. In addition, in order for financial conditions to be stable, you first need to learn to manage expenses. After that, you can make a plan to save and pay off existing debts. Keep in mind that paying off debts can take longer than accumulating them. Therefore, you need to be patient and go through the process diligently. In six months, you can already have a stable financial condition.
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Part 1 of 3: Living with Your Funds
Step 1. Make a financial budget
When creating a budget, you need to honestly review how much you're spending versus your income. The results of calculating your monthly expenses and debts may surprise you. If your main goal is to manage your monthly expenses so that your finances are stable, creating a realistic budget is an important first step.
- Make a list of all your bills, including the cost of rent or home ownership credit, transportation costs, monthly grocery expenses, and child care costs (eg nanny salaries). Also include existing debts, such as student loans, credit card bills and car payment installments.
- Find out the amount of your monthly income. List all income that can be used to pay bills each month. The income includes a monthly salary, share distribution, child care benefits, gifts and inheritance, as well as compensation deferred from retirement plans.
- If you're paid hourly, record your weekly earnings and calculate the average. This way, you get an idea of your average monthly income when you create a budget.
- Subtract your income by your total expenses. This way, you'll know if you've been spending too much. If your expenses are greater than your income, you need to focus more on the expenses you make.
- Make a plan to reduce your expenses significantly. By reducing your expenses, you'll have more money at the end of the month and you can use it to pay off debt or save it as an emergency fund.
Step 2. Reduce transportation costs
According to AAA, in the United States the cost of owning and operating a car in a year can reach more than US$ 8,000 (about 100 million rupiah). The cost of fuel, maintenance, car installments and insurance also affect the amount of these annual costs. Try to save money by selling your car and using public transportation to get around. If you have to go somewhere by car, use a ride-sharing service like GO-CAR or Uber. If you don't want to sell your car, reduce its use by using a pick-up service.
Step 3. Reduce the cost of using household energy
In the United States, the average family spends approximately USD 2,200 per year on household energy use costs. The amount of these costs is most influenced by the use of room temperature controllers. Look for ways to improve energy efficiency to reduce energy costs. Replace ordinary incandescent lamps (bulbs) with smaller, more efficient fluorescent lamps or LED lamps (light-emitting diodes). Install a hard-wired thermostat to reduce device usage when no one is home. Unplug all cables from the wall outlet when the device is not in use. Make sure your house is insulated so that no outside air enters the house, and lower the temperature on the water heater.
Step 4. Reduce spending on entertainment
Many people view entertainment as the first aspect of spending that needs to be reduced. It will be easier for you to cut spending on entertainment, without negatively affecting your lifestyle. Cancel memberships to gyms you're participating in, and reduce or stop using cable TV services (or internet access). Replace these entertainments with cheaper ones, such as running or cycling in the park, borrowing books and movies from the library, and visiting cultural events held in the city. You can also unsubscribe from newspapers or magazines and, instead, read them in the library. Also stop other private paid services like Spotify, Amazon Prime, or Netflix.
Step 5. Reduce spending on food
Make a daily menu list and cook your own meals at home. This way, you don't have to go out to eat. In addition, you can also bring leftovers that are not used up as lunch for the next day so you don't have to buy lunch at work. Use coupons or buy generic or generic products instead of buying expensive and well-known brands. Buy non-perishable or stale products (eg canned corned beef or sardines) in bulk to get a discount. Also, it's a good idea to start your own gardening so you have a steady supply of fresh vegetables.
Step 6. Cut insurance costs
If you have a healthy physical condition and don't have to visit the doctor or clinic often, change your health insurance plan to a high-deductible insurance plan (the amount you will pay for yourself will be high). Find out about various home or vehicle insurance services that offer more suitable premium rates. Sometimes, combining home and car insurance can reduce premium rates so you can save even more. Also, try buying term life insurance. This option is cheaper than whole life insurance.
Step 7. Provide a fixed balance in your savings account
Keep money that should not be used at all in your account. The amount may be around 5 to 8 million, or the equivalent of your income for 1 or 2 weeks. The balance is saved so that you have an emergency fund in case there are unexpected expenses at any time. This way, you will not be charged additional fees due to withdrawals that exceed the limit, or are forced to use a credit card for these expenses.
- For example, suppose that your rent payment is withdrawn from your account one or two days before your salary is sent to your account. Having a fixed balance can prevent overdrawing so you won't be charged withdrawal or refund fees.
- You should still have that fixed balance, even if you have credit card debt. As much as possible, make sure the nominal balance remains large. Allocate any additional income you have to pay off existing debts.
- It may be difficult for you to keep a steady balance if all this time the income you have is immediately used (and, perhaps, barely) to pay for daily needs. However, you can still provide that balance if you're trying to cut expenses or find other ways to earn extra money.
Step 8. Start providing an emergency fund
These funds are different from the fixed balance in your account. An emergency fund is a separate account that includes a balance of (approximately) three to nine months of income. You can use these funds in the event of an emergency, such as an illness or accident, layoff, major home repair or car repair. This emergency fund must be kept in a separate account that earns interest.
- Make sure your emergency fund account is different from your regular savings account so you're not tempted to make a withdrawal and use it.
- Compare the interest percentages at different banks. A bank in your city may offer an interest rate of 0.25 percent for a savings account. Meanwhile, some banks that provide their services online may provide higher interest because the bank does not have to pay building maintenance fees.
Part 2 of 3: Get Out of Uncollectible Debt
Step 1. Understand what bad debt is
Uncollectible debt includes credit card bills, personal loans, car purchases or other debts with an interest rate greater than 6.5 percent. Debt like this arises when your expenses are greater than your income. Once you have a fixed balance in your bank account, the next priority you need to focus on is reducing or paying off bad debts.
- Make a plan to pay off debts with the highest interest first.
- Alternatively, you can pay off the smallest debts first. This way, you can pay off existing debts faster.
- Loans or student loans are usually given with small interest (under 6 percent). You don't have to pay it off immediately, unless the interest on the loan is more than 6 percent. Continue to make the lowest installments, and allocate other income to pay off debts with higher interest or investments with the greatest return on investment.
- Keep in mind that there are several ways you can be exempt from student credit being taken. Some jobs, such as education and public service jobs, and certain programs, allow you to get debt relief (or even debt relief). Of course, you must meet the existing criteria to get debt relief.
- Home ownership loans (if you have one) are not considered bad debt.
Step 2. Calculate the amount of bad debt you have
Check all records or statements on credit card bills, personal loans, and vehicle ownership loans. After that, add up all outstanding debts. The result of this sum is the total debt that you have not paid off.
For example, suppose your credit card bill is 50 million rupiah. Your personal loan reaches 70 million rupiah, and your vehicle ownership loan reaches 150 million rupiah. This means, your total uncollectible debt reaches 270 million rupiah
Step 3. Determine your debt-to-income ratio
Divide the amount of your debt by the amount of your annual income (gross). This way, you will get an idea of the amount of debt you have. If the ratio exceeds 35 percent, you really need to focus on paying off those debts.
For example, suppose your debt is 270 million rupiah and in a year, you earn an income of 480 million rupiah. This means that your debt-to-income ratio is 56 percent (270/480 = 56.25)
Step 4. Change your lifestyle
Focus first on changing the behaviors or lifestyles that actually increase your debt. Know that by accumulating too much debt, you are exceeding your financial means. Even if you're forced to borrow money because you've lost your job or are sick, you still need to check your expenses and make lifestyle changes. Budgeting and reducing expenses can help you stop spending more than you earn.
Step 5. Move over high-interest debt
If you have a credit score of 700 (or higher), you're eligible for a new credit card that offers customers zero percent interest. Of course, this allows you to transfer debt to the credit card from a card with a high interest rate. Generally, this interest-free period lasts for 12 months. This means, during those 12 months, the installments you pay every month can help reduce existing debt.
Step 6. Try peer-to-peer lending
If your existing debt is too large and you can't get a new credit card, try getting a debt pooling through a peer-to-peer lending network (the practice of lending money to individuals without intermediaries). Since there is no bank involvement in the lending process, there is a chance that you will only get a small interest. If you meet the requirements, the lender can provide a personal loan with a fixed interest for three or five years.
Some examples of peer-to-peer lending networks in Indonesia, among them, are Investree and Modalku
Step 7. Try taking credit counseling or debt management exercises
If you haven't met the requirements for a new debt or personal loan, you need someone's help. For example, you can take credit counseling. In the process, you will work with professionals who can help make plans to pay off existing debts. Meanwhile, in the debt management process, you will work with third parties who can negotiate with lenders to provide you with lower interest or installments so that you can pay off existing debts.
- Try visiting a credit counseling agency in your city (eg Toyota Astra Financial Services). They can refer you to a trusted credit counselor who can help you plan your debt repayment.
- Avoid fake debt management services. Many companies with bad reputations will try to charge you high fees or promise you something that they don't deliver in the end. Don't work with debt management service providers who charge upfront fees. It's a good idea to find out in advance about the company or agency that provides debt management services on the internet or through certain agencies (eg in the United States, you can get information about trusted debt management services through the Better Business Bureau). Read the given contract carefully so that you understand the debt management process that the company will carry out.
Part 3 of 3: Earn More Income
Step 1. Earn extra income
Spending cuts and lifestyle changes may help you have enough money to pay off any remaining debt. However, you may need to increase your income to earn enough money to get out of debt. Many people are still 'entangled' in debt because the debt installments are quite large, while they do not have enough money to cover their daily expenses. This is what keeps them using their credit cards. By earning more money, you can reduce your dependence on credit cards and focus more on paying off existing debts.
Step 2. Work as a freelancer in your spare time
Use your acquired skills to earn extra income. If you have good writing skills, a flair for design or an artistic flair, you can earn money by providing services that match those skills. If you are doing the same job as the one you have or are currently doing, be careful not to run into competition with employers or your boss. See if you can sign an anti-competitive agreement that can keep you from competing directly with your employer in the same industry or line of work.
- Some freelance writing jobs include writing blog posts and creating content for sites. In the United States, content writers are paid US$0.03 per word (about US$3 for 100 words). Meanwhile, guest writers on blog posts are usually paid up to 50 US dollars per article. For the Indonesian market itself, the salary for writing content or articles generally ranges from 15 thousand to 45 thousand rupiah per article, and for a contract fee it can range from 3-6 million per month.
- If you have long enough experience as a graphic designer, you can earn (up to) 1 million rupiah per hour by designing advertisements, website main pages, book covers, brochures or company reports. It's a good idea to create a website promoting your skills (eg you're ready to be hired as a graphic designer) as well as links so visitors can see samples of your work and testimonials from past customers.
- If you have a DSLR camera and are able to use photo editing apps, you can make some extra money by becoming a photographer, either a wedding photographer or by selling stock photos. Family or portrait photographers are usually paid around IDR 1 million per session. For a wedding photographer, the fee can reach tens of millions of rupiah. For stock photo sales, one photo can be sold at a price of 0.15 to 0.5 US dollars (equivalent to 2 thousand to 7 thousand rupiah).
Step 3. Create and sell arts and crafts
If you have a talent for arts and crafts, you can sell your work. Create a dedicated website featuring your work or sell it on sites like Qlapa or Craftline. You can also ‘entrust’ and ask the seller at the art market to sell your work. Alternatively, you can rent a space at a craft fair or market and sell your work there.
- Make jewelry from ordinary or unique materials. When determining the selling price, make sure you consider the purchase price of the basic materials and the time of manufacture.
- Make crafts for celebrations or special days, such as Eid, Christmas, Independence Day, and Valentine's Day.
Step 4. Sell your skills
If you have talent in a particular field or expertise related to a particular activity or hobby, create a digital product to share your knowledge and expertise. Writing e-books or providing online courses can be good sources of passive income. This means that once you create a product and sell it, those sales will continue to generate revenue, even if you are no longer actively employed.
- If you have a blog, you can combine all of your existing posts into an e-book that can be sold to e-book platforms, such as Amazon's Kindle Direct Publishing.
- Create online courses through sites like SekolahPintar or IndonesiaX. For each course, tutors or course providers can be paid 500 thousand or more, depending on the topic. According to Forbes, in the United States the average instructor or course supervisor earns around 70 million rupiah per class or course given.
Step 5. Try being a tutor or mentor
If you are a teacher and specialize in (for example) foreign languages or playing a musical instrument, try tutoring in those areas. Find students to mentor through word of mouth or advertising in newspapers (or even websites and forums on the internet). Give private lessons in person, or take lessons over the internet (eg via platforms such as iTalki or Smart Schools). In the United States, private tutors are paid around US$30 per hour or more (if the degree is higher). In Indonesia alone, the salary of private tutors may not be that big (per session, the fees they receive range from tens of thousands to one hundred thousand rupiahs). Music tutors earn around 250 to 300 thousand per tutoring session (lesson sessions can last from 30 to 45 minutes). Meanwhile, for teachers or lecturers in adult education institutions, the fee can reach around 200 thousand rupiah per hour.
