Serious debt problem: 4 Key Q&As to immediately help you out

Asians have a reputation as being big savers. Many are saving to buy a home or invest in property, saving to provide the best education for their kids, or saving for their old age. According to one recent HSBC survey, Singapore men have a higher amount of retirement savings than any other men or women within Asia. This is partly why Asia has been able to enjoy such a high level of economic and financial success, which is evident to this day.

However, what is less well known is that China and India, with a total gross savings rates of more than 40% and 27% respectively, now dominate the ranking of world savings rates, and boost the overall Asian presence. Singapore does not feature in the top 10 world’s best savers.

In fact, Singapore is ranked number 2 in the world in terms of its debt-to-GDP ratio. Although around three quarters of all household debt in Singapore is attributable to the deeply ingrained culture of home ownership, it is nevertheless still somewhat surprising.

For most Singaporeans, having a mortgage and regular credit card usage are normal activities. The salary ensures that the home loan repayments are made on time, the retirement fund gets topped up, and the credit card is paid off in full each month.

However, there are some Singaporeans who are really struggling to balance a budget and make ends meet. For those of you who are in this category, and beginning to feel overwhelmed by trying to pay off your debt, our article is designed to help you recognize the issues, and avoid a full-blown debt problem.

1. Are you consistently spending more than you earn?

Although it might not be uncommon to have one or two months where you spend more than what you earn, perhaps due to a lump-sum payment for your new furniture or paying for a family holiday, it should not happen every month.

Consistently spending more than you earn will almost inevitably result in the need to access a credit facility. It is easy to do this, especially with a credit card, because you have a 30-day cycle to pay off what you use, depending on how you manage your cashflow. But getting into the habit of doing this can become dangerous in the long term. Being unable to pay for just one or two months can quickly accumulate into owing a much bigger and unmanageable amount.

What you can do: Set up a monthly budget for yourself to ensure you spend within your means.

 2. Is paying the minimum amount on your credit card a perpetual habit?

Some people pay only the minimum amount owing on their credit card in order to obtain extra cash to spend on other things. If you are one of these people, although you can avoid a late charge, you are faced with a much higher interest rate payment of up to 26% per year. Because the interest compounds, debt will balloon extremely quickly into a likely uncontrollable amount.

What you can do: Make sure you always pay off in full your monthly credit card bill.

3.Do you continue to use your credit cards even when you have problems paying the bill?

This is a classic shopaholic problem – being unable to control impulse purchases, made easier with a credit card bill with which you do not have to deal until much later. Of course, you are simply delaying the inevitable and building up bad debt.

What you can do: Do not leave the house without your carefully thought out shopping list of strictly necessary items. If you cannot do this, either keep your credit cards at home, or cancel them entirely.

4. Do your debts take up more than 60% of your monthly pay?

It makes sense to consider your debts in proportion to how much you earn. Management of your budget, including debt management, will be much easier. In Singapore, one way that the government helps is by ensuring that no one is allowed to take up a home loan unless the total debt servicing ratio is less than 60%. Total debt refers to all outstanding debt, including home loans, car loans, student loans and credit cards. You can calculate your own debt ratio by dividing your total monthly debt by your monthly salary.

What you can do: Reduce your debt as much as possible, including and especially paying off your credit card, so that you have a lower overall debt level. You should always prioritise paying off debt which have been attracting higher interest rates, and you might want to use debt consolidation facilities.