Most Singaporeans normally find themselves at crossroads when it comes to juggling their their finances. They are torn between these two alternatives: either to quickly pay off their debts or to save their money for emergencies.
When you are indebted by a loan from a licensed moneylender but you have no savings, it’s only natural that you are going to be concerned with which of the two to take care of first. You are unable to take care of emergencies when you lack savings. On the other hand, taking long to repay your debts is crippling since you will have to pay more in interest rates. So what can you do when faced with such a dilemma?
The following are some vital tips that Singaporeans may use to solve the dilemma.
Paying Off Your Debts Vs. Building Your Savings
The case for paying off your debts is firstly influenced by interest. Know that you are bound to pay more in terms of interest when you take longer paying off the debts. But it is also not recommended that you go for a long period of time without savings. The reason behind this is that when you fail to save, then you’ll potentially fall into some poverty cycle.
For instance, you’re keen on repaying your credit card debt. So to speed up payment you end up paying S$3000 out of your S$4,000, leaving you just with a balance of S$1000 which to survive. But what will happen when you get into some sort of emergency, like if you get into an accident that will end up costing you S$2,000?
There are high chances that you are again going to use your credit cards for the money. This will further leave you in debt. The point here is that when you fail to strike a fair balance between debt repayment and saving,you will be confronted with a situation where your pay cheque disappears immediately you receive it (whereby all of it will go into debt repayment), while at the same time debt itself does not appear to go away.
Situation Number One: You’ve Debt You’re Unable to Repay in One Year
When for some reasons you just can’t repay the whole debt within one year, then it’s recommended that you repay it slowly by slowly (but admittedly you pay more interest on it), while you are still building up your savings. As a general example, just consider your housing loan. You owe S$200,000 on the HDB flat. Overtime you’ve managed to accumulate savings of some S$15,000. The rate of interest on your mortgage is, say 2.6% per annum.
Now do your math. You could try speeding up repayment by putting all the amount of S$15,000 immediately into the repayments for the mortgage. However, you should ask yourself the situation that route is going to leave you. Before rushing your mortgage repayment your position is S$200000 (in debt) minus S$15000 (in repayment) which equals to S$185,000. When you were to commit all the amount of the S$15,000 into your mortgage repayment, your net position is going to be S$185,000 (in debt) minus S$0 (in assets), which still is 185000.
From this, you can discern clearly that there has not been any change concerning your net position. The only difference here is that you lack now any savings when you’re confronted with emergencies. And this is the main reason why majority of individuals don’t want to speed up repayments of their HDB home loan. Now you can apply similar scenario to the other debt forms. When you are unable to wholly repay your debt, and you’d take more than one year to do so, a balanced approach is needed here.
You can set aside 50 percent of your monthly income. From this amount, put 20 percent into savings while the remaining 30 percent in repaying your debts. For instance, when you are taking home a monthly salary of S$4,000 after taxes and CPF, you may set aside S$1,200 for repaying your debts and S$800 in savings.
Note that the exact ratio is going to differ depending on the amount you owe plus the rate of interest. It is advised that you speak to your financial advisor when you need to strike the right balance. But you ought to remember that for those debts you are unable to quickly repay, you ought to maintain a saving plan while you are slowly paying them off.
Situation Number 2: You’ve Some High-Interest Debt You’re Unable To Repay in One Year
This category of debts include those of credit cards. What you are going to need when you find yourself in this kind of situation is restructuring your debt obligations. You should take a lower interest rate to settle your higher interest debt. Then you may save while you’re settling the cheaper loan.
For instance, you owe S$10000 in credit card debt having a 24 percent interest rate per annum. You may take out some personal loan of S$10,000 at six percent per annum, and use this to settle the credit card with the amount. You’d then go ahead to save while at the same time settling your personal loan, as found in Situation One.
You should get here a personal loan having the lowest interest rate. Among the best now in the market is the HSBC Personal Loan.
Situation Number Three: You Can Pay the Whole Debt in Six Months or Less
When you are in a position to repay your debt in some relatively short amount of time, like six months or less, it sometimes makes sense you repay the debt before saving. Several banks basically provide for up to six months interest-free balance transfers, making this option to be extremely viable.
But when you happen to adopt this route, it calls for a lot of discipline and you should repay the debt to your money lender immediately. You should also take your circumstances into account. When there’s a probable chance you are going to urgently require money, you may still opt to save and slowly settle the debt.