It is best to work out your finances before taking a loan or you might end up in a debt trap.

 

Many of us will take on debts like housing loans at some point in our lives. Before you do, it is important to understand that getting into debt is a major responsibility. Too much debt can easily get us into trouble.

Before you borrow, take a little quiz:

• Do I really need it in the first place?
• Is there another way I can pay for this?
• I already have other monthly expenses. Can I still afford it?
• How much should I borrow?
• How much do I have to pay every month?
• How long will it take to pay off my loan?

Don’t allow your debt repayments to take up a large proportion of your pay.

Here are some ways to avoid getting “unhealthy” with debt:

1) Don’t take loans you cannot afford

The more debt you have, the harder it is to save for important things like your retirement, or even your children’s education. Before you take up a loan, use the “Debt Calculator” on www.moneysense.gov.sg to work out how long it will take to clear your debt and whether you can manage the monthly repayments comfortably.

 

2) Get interested in interest rates

Do you know the difference between “effective” and “advertised” interest rates? Do look up at www.moneysense.gov.sg for more details on the different types of interest rates and how they are calculated. Knowing how interest is calculated can go a long way in helping you make better borrowing decisions.

 

3) Read everything before signing anything

Don’t sign any documents until you have read and understood your rights and obligations clearly. Once you sign, you are legally bound to the terms and conditions of the contract.

 

4) Don’t borrow to pay a debt

Borrowing money to pay another debt is one of the first sure signs that you are having trouble managing your debt.

 

5) Stay on track with the big picture

Is your debt situation getting messy? Use a worksheet to keep track of your loans and their interest rates. Pay off the ones with the highest interest rates first. But, always check if there are additional charges for the early repayment of a debt.

Here’s an example of a worksheet to track all your loans and take the first step in managing your debt better.

 

Lender
What is this for? (e.g. car or home loan)
Total amount owed ($)
Monthly payment amount ($)
Payment due date
Last payment due
Interest rate (%)
Expiry date for lock-in or lower promotional rate
Priority of payment **

 ** if legal action taken, give priority to settling this debt.

 

6) Consolidation & save

Having difficulty keeping up with a number of loans? Approach your lender for help to restructure your debts. For credit card debts, consider a balance transfer, if this could help you save on interest charges, while making it easier for you to track your repayments and their deadlines. Remember also to check fees, charges and other terms and conditions that could add to your costs.

 

(** The above information is extracted from the “My Money Book” produced by MoneySENSE. To access “My Money Book” which features money management tips that people from all walks of life have found handy, please refer to: www.moneysense.gov.sg/~/media/Moneysense/Guides%20and%20Articles/Guides/My%20Money%20Book_301013.pdf)

Here are some tips: “In our retirement, remember that we have worked hard all our lives to get to where we are. So we don’t have to prove anything to anyone – don’t be concerned about what other people think – where we choose to live, the car we drive, where we eat – keep fit and healthy, and treasure our family relationships. Remember, if we have to worry about what our friends think, then maybe we have the wrong type of friends.” – Nigel Yeo, 59, semi-retired Use credit cards prudently. “Singapore is a fantastic place to live in but be wary of over-committing on finances. Many large ‘ticket’ items appear to be affordable but when you do your sums on higher purchases or mortgages, look at the overall costs and not just the monthly payment, which may appear manageable as it can weigh heavily on the collective expenditure. Use credit cards prudently and with caution as it is very convenient but comes with high interest rates and if we only make minimum payments, a mould hill becomes a mountain in a short space of time.” – Capt Frederick Francis, 53, senior lecturer “1. Debt reduction: Do not charge to our credit cards, if possible. If we do, then instruct your credit card companies to deduct ALL of your expenses from your account EVERY MONTH. 2. For ladies of retirement age, we need to tell ourselves we can look good without being addicted to the latest fashion. Hence, there is no need to shop for the latest fashions. Invest in a few good classically-styled jackets and pants/dresses to wear for official occasions.      3. Have a mindset that it is time to de-clutter, then buy new things. Add “NO, I don’t need this” to our vocabulary, especially when we visit shops during the “Great Sale”. Shops use sales to de-clutter their warehouses, thus transferring their clutter to our cupboards. 4. Save the environment and Mother Earth – join and borrow books, movies, etc, from the library. 5. Ignore expensive branded-goods. For footwear, buy your shoes from Bata. Bata is a Switzerland-based (yes, Swiss!) company. Their shoes are comfortable, strong and reasonably-priced.” – Mary Soon, 71, semi-retired

 

(** PHOTO: Business graphics, DaVinciS, freeimages; 3D dollar sign, rigor789, freeimages; and Cut expenses 1, lusi, freeimages)

 

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