Category Archives: Debt

Article on debt

How to approach your student loan repayment (or any other debt)?

I came across a forum post talking about student loan repayment, the writer is asking for people to partner with him and held him accountable for his own student loan repayment schedule. I paid off my student loan last year, below are some of the things I think will help you if you are setting goal to pay off your student loan.

1. Calculate how much money do you need to pay back

This is the first and most obvious thing to get clear with before you start any repayment. Go to your online banking account, pull out your bank statement, call your bank to confirm the outstanding balance of your loan. Don’t try to do any of the steps below before you completed this step.

2. Set your mind on a target date with timeline & plan

Nothing get done until you get serious. Setting a target is not enough to achieve what you want to achieve, and this apply to your journey of student loan repayment too. After getting know how much you need to pay back to the bank, draw up a repayment schedule that is suitable for you. Be a bit more aggressive on the schedule by looking at your disposable income. For example, if you are able to fork  out $500 every month to repay your student loan, set a goal to fork out another $100-$200 every month for the same purpose. This might give you a little pressure but this is also a good opportunity for you to learn how to spend your money effectively and efficiently to support your life.

3. Do it together

Depends on your preference, you can invite your friend who are also have the same desire to pay off their student loan to embark on this journey together with you. Accountability to another person will ensure your chance of success because it give you a reminder every time you want to spend money on unnecessary stuff. You and your buddies also can encourage each other during this challenging period.

4. Take up second job

This is optional I would say. If you have a promising job, I suggest your give your 100% in that job and performs the best you can be at that job. However, after said that, take up a second job does few things that beneficent to your repayment target. Firstly, it will give you some extra income to put into your loan repayment and speed up the process. Secondly, you might be able to learn some new skills in second job that compliment your main job. Third benefit is not related to loan repayment, you might be making new friends on the job and expand your network.

5. Live frugal but comfortable life

Although I think this go without saying but I will mention here anyway. Frugal means different thing to different people, so I won’t be defining how should you live then be considered frugal. Bottom line is you are comfortable with the life style and spending habit you chose and willing to responsible for the outcome without blaming other people when you are unable to achieve your goals.

Other considerations

Well, we can always expect the unexpected to happen in life…

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Don’t let debt control your life.

I was meeting one of my friend and had a few hours talk that day. One of his idea intrigued me, which is about how took up mortgage and car loan make him a better person, a more responsible person. His argument to me was with more loan/mortgage, he felt he had more responsibility financially. It motivated him to work harder, went out to work more often, earned much more income. As the conversation get longer, I started to feel more and more uneasy with his ideas. Somewhere inside me feel that maybe he got the sequence wrong, it was not those debt/mortgage that made him a better person, he became a better and more successful person before he can afford those loan/mortgage.

It is a popular idea to divide debt into good debt and bad debt nowadays. Good debt by definition is the debt that can earn you money, create more cash flow for you, bad debt is the opposite side of good debt. Accumulate bad debt is easy, just go out there and buy that fancy car or that latest gadget on the shelf on credit when you have no idea how to pay off the other two credit card that you has used up their credit limit. Good debt is a bit tricky, I read a few books on this, and I still confuse. The idea seems to be you borrow money  you don’t have to invest in investment vehicle that nobody can guarantee its return. If return on investment of that vehicle is higher than the interest on the money you borrowed, you are called ‘leverage’ else you are ‘over leverage yourself’.

Right now, I am not ready to take on double risk for my own personal finance planning. Saving accumulation still the number one priority on my list now, professional development for a higher paying job is second on the list. Sometime I get into discussion with friend about whether high saving rate or high income is more important, that discussion always ended both parties agree that both are important. With living cost in Singapore maintain at certain level, you cannot have a high saving rate if your income is too low. In theory, a person with a monthly income of 10K, A and saving rate of 80% is having the same live style as another person with monthly income of 2K, B and no saving. In this case, if B is able to increase his income without increase his expense, his saving rate will be growing without his knowing and not affecting his life style.

Back to the topic of debt, sometime people don’t realise the effect from their purchase. Take smartphone as an example, a decent smart phone can cost up to $1000 now. Assuming a typical consumer change their phone every 2 years, which means he has a monthly instalment of about $42. This instalment is permanent unless his behaviour changes and stop chasing the latest gadget every two years. Now let’s see what did he gave up for that smartphone. In order to produce that same $42 every month with a investment vehicle that return 5% per annual, he need to invest ($42 x 12)/5% which means $10080 invested.

Of course I am not suggesting that you are not allowed to buy a phone unless you have $10080 accumulated in your investment. You are free to spend your money anyway you want since you have put in the hard work to earn that money. I just hope that before you make decision that will affect your monthly cash flow, you are fully aware what are you buying into and you are perfectly comfortable with that.

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How much is house costing me( or you)?

As I written in previous post, I bought a house with the price tag RM 196,000, it make me wonder how much is this house costing me in absolute cost and working years.

I listed the the cost involved so far and interest I expected to pay if we pay the mortgage off in 10 years.

Deposit :RM1,000

Insurance :RM4,530

Lawyer fee :RM3,100

Disbursement :RM1,130

House loan :RM196,000

Housing loan interest for first 10 years :RM 78,122.68 

Total :RM 283,882.68

As I am sharing the ownership with my sister, my part of responsibility will be RM141,941.34 and that is excluding all the renovation cost , maintenance cost and car cost which might be coming along when my parent move from village to a small town.

Since I am working in Singapore right now, I will use my saving rate in Singapore currency and the current exchange rate to calculate the real cost of my future house.

Current monthly saving amount: SGD 1,500

Exchange rate: SGD 1.00 to RM 2.50

House cost in SGD = RM 141,941.34 / 2.50 = SGD 56,776.54

So, I will need about 38 months of work to cover that cost of my house. Not to mention the opportunity cost I will need bear during those 10 years. 5% of SGD 56,776.54 will give out SGD 2838.83, that is one good passive income to hold on 🙂

Situation here in Singapore is a bit different, a small simple 3 rooms flat here is priced at SGD 330,000(I am talking about minimum). With median salary now at SGD 3,000, it is no wonder not many people staying in Singapore now think they can retire early in Singapore. Besides that, there are other influences here to that make it difficult to retire early too.

It is kind of socially unacceptable for man to not working here, a man look weak without a job here and not many man can accept that.

Secondly, it is very consumer/spending driven here in Singapore, this country is importing everything and we can buy almost everything we need in our daily live and a little bit extra. There are all kinds of interesting product and services that waiting there for us to spend our money on them.

Thirdly, supporting old age parent is expected here in Singapore given there is no solid retirement support system and I think the problem will be even bigger in the future. You might be thinking your living cost will be lower after you paid off your mortgage but the medical cost kick in in old age, so expect more spending during your parent old age (and your own old age).

I just realized I am a bit out of topic here, the points I want to make here is view your house as a liability before you pay off your mortgage and don’t think the house price is always going up. Only buy when you are ready, sometime renting is not a bad decision either.

What do you think?

 

 

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What is mortgage teaching us?

Mortgage is one of the loan that having the longest loan tenure, lowest interest rate and most neglected commitment. I guess it is partly because it can be extend to 30 years or even 35 years and its monthly payment is so low. There are even countless advice teaching us how to choose a suitable loan package, how many percent of our salary should we direct to mortgage payment and how much we can afford.

For the past one year, I have been looking around for a place for my parent who are now staying in Malaysia. This was not in my retirement plan before because investment income is more important to me. To me, having investment income actually more stable than buying a house now. For example, if you are paying RM 989.74 a month for your RM 200,000 mortgage for 30 years, you are paying in total RM356,307.44. The interest of the mortgage alone has cost you RM 156,307.44 over 30 years( see image below, calculation from http://www.calculator.net/).

mortgage cost

At the other hand, RM 240,000 invested in an investment vehicle with 5% will give us RM 12,000 yearly and cover that mortgage for years to come. Currently, my savings is still quite low after paid off my student loan. I am still in the stage of saving money to accumulate at least certain amount of capital before I can try my hand on investment. There are many resources on the web now that provide basic knowledge on investment, teaching us what is stock, option,mutual fund, index fund, etc…  I am planning to spend some time on learning all these basic before I start putting in my own money into any market.

Renting or buying is always a debate topic when we are talking about housing. One simple rule of thumb when you are deciding whether to rent or buy a place is the property price. It is wise to rent when the property price is high and it is wiser to buy a house when the property price is low. How to decide whether is the current property price high or low? It depend on you, if you think you can afford the house, it is low, else it is high. It might sounds like a irresponsible advice here but it is also true because everyone situation is different. Only you yourself can decide whether you can afford a house, keep in mind that buying a house involves cost during the transaction and also renovation cost before you are even in the house.

Renting a house will not give you all this cost and you are free from all the hassle that come from owning a house. Another benefit come with renting house is you can choose your neighbor. If your neighbor happen to be some crazy people that like to making noise during the night, you can easily move to another place when your rental agreement expired.

 

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A Financial Question That Cannot Solve With Financial Solution

If you shop around credit card market frequent enough, you will see many balance transfer offer from the banks. The basic idea of balance transfer is help you “save” on the interest you might need to pay on the balance you have in your credit card. Instead of label bank as evil money sucking machine, let us focus on the problem itself, why is the balance there in the first place.

I have been reading a lot of personal finance blog when I was searching for ways to clear my student loan and have received many ways to manage debts. Some suggested paying off the smallest loan first, some suggested paying off the loan with the highest interest rate. They all are decent advice that either make emotional sense or financial sense after you incurred the debt. What are missing is why are we in those debt in the first place.

Lack of information
I made my first loan commitment decision when I was 21 years old. The loan application form came together with my university admission form. The offer was an good opportunity for me at that time to receive tertiary education and secure a better future. I was able to complete my education with that loan in 3 years and went into job market with a degree scroll in my hand.

What I am missing when I graduated from the school was student loan also a form of debt, it bears interest rate and costing me more than $100 a month when I was paying $200 per month to the bank. I was ignorant and totally ignoring the fact that “$200 per month” is costing me a lot in long run. At the same time I received advice from relative and friend saying student loan is good debt and since its interest rate is so low, there is no rush to pay off that loan. This definitely not a good advice among all the advices I received over the year.

Back to the credit card balance scenario, I believe most of the people have realized what credit card offered was not free money, it bears interest rate and the interest rate is very high, up to 28%. We should view it as a convenient tool to pay for our purchase rather than free money from bank. Making just the minimum payment per month is not acceptable at all because with the finance charge and future purchase you are going to make, it will cost you three arms and four legs to pay off that debt.

So, if you are feeling you are not getting ahead in your debt management, it might be helpful to filter the information you receive and really plan something that working for you and you only. But I think the universal solution to debt is always pay it off as fast as possible and no excuse should be made.

Brainwashed by marketing
We are all influenced by marketing at various level and I believed nobody can escaped from it. The question we need to ask ourselves is whether the product presented to us really helps us in the long term or it just give us a sense of excitement for 3 days before we get bored of it.

I experienced this process with my iPad 2 purchased 10 months ago. It gave me maybe up to a week of excitement for owning it and I rarely use it nowadays because I mostly works my stuff on my laptop. I believed I am not the only one who with this experience because I read so many buyer remorse review on the web and from my friend.

It is very difficult to avoid marketing or advertisement in today world. They are everywhere wherever you go. One of the method I like to use now is delay my purchase decision. Put the items you intend to buy into a wish list and wait for 3 days (or whatever numbers of days that works for you). If your desire and justification is still strong after 3 days, and you have fully understand the benefit from that product, it should worth your money and effort.

Lack of planning
Things happens. If we view our life as a long period of time, things happens. It might be an accident, illness, job loss or opportunity. Whatever it is, it require fund, sometimes a lot of fund. Insurance in this case is a must for all of us (unless you are so poor that you don’t ever know where your next meal is). The idea of insurance is to insure us against financial disaster we are unable to take it. For example major illness or serious accident that take away our ability to work and costing us a huge amount of money.

Other than insurance, an emergency fund should be save up to handle any less intense incident happens in life. For example job loss or some other unexpected family expense. The size of the emergency fund vary among each individual due to different lifestyle but a fund with size equals to 6 months of your salary should be enough yo tide you over those unexpected incident.

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A Very Simple Early Retirement Plan

Although I am still in the debt-paying phase of my early retirement journey, I am constantly searching for profitable investment opportunity that is simple enough for me to take advantage when I am done with current phase and moving into investment phase. Some ideas were given to me through word of mouth, newspaper and blog:

Property

Property market in Singapore is really booming for the past few years where we see a price increase up to 2-3 times of the original selling price. And this is happening all over the island and no one know when will the party ends. Increasing property price create an investment opportunity but the high property price also means a higher barrier for normal people to invest.

Stock

Stock is the second thing come to mind when people are talking about income generating asset. If you want to buy stock in Singapore, you will need a CDP account and a broker account. I have both of them but somehow I does not feel comfortable to link my money with the fate of one single company.

Exchange-Traded Fund (ETF)

I read it first on Mr Money Mustache, after that on Tan Kin Lian blog and then Jim’s blog. You don’t link your money with the fate of one single company but the top 30 in the Singapore. No doubt there is always chance that all 30 companies fails, but admittedly they should have lower chance to fail together. One of the good things about ETF is the lower expense ratio (basically means your cost of investment) compare to the regular fund, usually less than 1% per annum.

For Singapore, I found 2 available ETF, which are SPDR Straits Times Index ETF and Nikko AM Singapore Straits Times Index ETF.  They both are having an expense ratio of about 0.3% per annum. Based on what I understood from their website, this two ETF will replicate as closely as possible the performance of Straits Times Index and can be traded like any share on Singapore Exchange. Everything seems ok with this investment except I can’t find any information about their dividend payout.

 

Ok, I think my very simple early retirement plan is getting really complex by now. With so many investment choices lying around Singapore, it seems early retirement was not so far ahead and beyond the reach of normal people like us.

So, here is what my current early retirement plan look like:

  1. Control Spending (I think I have done pretty good in this area)
  2. Clear Debt (Still working on this, 4 more months to go!!!)
  3. Invest in one of the STI ETF mentioned above (or maybe both).
  4. Keep searching for ways to builds income stream that does not require my attention (at least not full attention) after initial setup.

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How To Clear Your Debt Quickly?

//An old post of mine, a lot of things can happen in 3 years. ^^

Debt, the word that I believed most of us doesn’t like its existence in our life (unless you are the fan of “Good Debt, Bad Debt” and you are obviously holding a lot of good debt).

What I am going to talk about in this post is bad debt/consumer debt. This category of debt includes credit card debt (swipe your card, buy that 48 inches LCD TV now, the discount only last 3 more seconds!!!), car loan (buy the biggest car you can afford that impress your friend and get stuck in traffic jam every morning during peak hour….), student loan (this loan category is a tricky one, it can be a good or bad investment, and I will put my thought on it later).

Face Your Debt

Obviously, the first step in clearing your debt would be know and acknowledge your debt situation. Consolidate the amount you owed on each debt category from the highest interest rate to the lowest. Remember not to put any emotion when you are doing this activity, there is no point to put the blame on yourself on the past mistake you made, what you should be focus now is make the decision to correct that mistake.

Pay The Highest Interest Loan First

There are many suggestions floating around the Internet on how to prioritize your debt repayment. Some suggests you pay off the debt with the smallest amount to build up the momentum, and there is others suggest you to pay off the debt with highest interest rate. To me, the second suggestion made much more sense and that forms my debt repayment plan.

I am focusing on paying off my highest interest debt (student loan with an annual interest rate of 4.75%). I am holding a minor credit card bill right now but I am not so concern with it because it is a 0% installment plan. I just have to make sure I make the payment every month and I am safe.

Prevent The Leak

Fortunately, my spending habit was already quite frugal, I don’t pay interest on my credit card bill (there are not many product that target single guy), I don’t own a car (you don’t really need to own a car in Singapore and here is why), I cook my own lunch, cycle to work, sleep earlier (this not only helps your body to have adequate rest but also make your wallet thicker since you have less time doing shopping).

The initial amount of my loan is about SGD$15,000 each (Yes, I took up two loan to finance my study). I paid off a grand total of SGD$8,000 in the first 7 years after my graduation (July 2005 to July 2012) and that left me with a balance of SGD$22,000 in July 2012. And I decided to get serious to pay off that loan, I monitor my spending closely, increase my income when opportunity arises, cut down on unnecessary spending, grows my saving.

5 months later, I reached my first milestone in paying off my student loan, I paid off one of the two student loan on me and I am now officially down with just one student loan with the amount of SGD$11,000 (annual interested = 4.75%).

Get Serious

From that little story of mine, I would like to bring up my point in clearing debt quickly, which is get serious. If you are in a debt situation, no matter is it a credit card debt, a car loan, a student loan or even a housing mortgage, it is a debt that bank charge you interest every single day, it should be the first item on your priority list. You should not be in dilemma when choosing between your new fancy smartphone and your debt repayment; there is no point on deciding where to put your furniture when you house is on fire!!! Put out that fire of debt that is burning your early retirement house first before you decide what investment furniture you want to put in the house.

While you are on the way to clear your debt, help yourself by not taking up even more debt, especially credit card debt (this is by far the easiest way for an individual to acquire a consumer debt, just swipe your card and you are $2,000 in debt immediately…).

Also, don’t let those balance transfer deal confuse you. It didn’t make you debt go away, it merely change the ownership of your debt. You still need to know your debt amount, get serious in pay off the debt as quickly as possible. Balance transfer is just a short term solution to help you avoid incurs high interest (up to 28%)on your credit card. If you are currently paying 24-28% plus other charges on your credit card debt, then it might make sense for you to jump around the balance transfer deal while you are working to raise the fund needed to pay off those debts.

So here are the few things I think we need to know to clear debt quickly. The things outlined in this post might be proved too simplified or too complex for your situation, please leave your comment in the comment section if you came across with some great idea on clearing the debt.

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