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26-09-2010, 11:54 AM
Quite a shocking article which highlights how the 20-29 age group is building up debt and defaulting on credit card payments..... 
Sep 26, 2010
Generation Debt
Survey shows twentysomethings have highest rate of loan default in the country
By Lorna Tan, Senior Correspondent
Young, married and swimming in red ink. That was the less than happy picture of twentysomething Singaporeans which emerged from a survey that tracked how people here are handling debt.
It found that those in the age group between 21 and 29 have the highest rate of loan default in the country, with married folk being the worst among them.
The plight of Mrs Teo, 26, illustrates the problem.
Mrs Teo (not her real name) chalked up more than $10,000 in credit card bills and a term loan.
Her woes started when she switched jobs and suffered a drastic 40 per cent pay cut that soon left her struggling to pay even the minimum amount required on her card bills.
There are many others like her, according to credit and business information company DP Credit Bureau.
It said defaults in the twentysomething age group grew from 5.07 per cent of outstanding payments in January last year to 7.16 per cent by December. This far exceeds the 3.11 per cent average for all consumers.
Credit card defaults were the most common across all age groups. The other debt types include overdraft, mortgage and motor vehicle payments.
The survey also found that people aged between 30 and 39 have the second highest percentage of bad debt records at 3.79 per cent. Those over 69 have the lowest rate of debt default.
Financial experts reckon young adults are in trouble because they lack discipline and have a poor grasp of financial matters. It is a common attitude among young people that saving for retirement is something only old folk do.
Mr Ben Fok, chief executive of Grandtag Financial Consultancy, says twentysomethings tend to buy things based on what they want, not what they need.
'Obviously, they cannot exercise self-control... They have not mastered the art of delaying gratification and spend more than they can afford to. Another trait is that they do not know where the money goes to,' he adds.
Mr V. Arivazhagan, managing director of regional investment and treasury products at DBS Bank's consumer banking group, agrees: 'Young adults may have the tendency to succumb to pressure from peers and indulge in expensive exploits, such as buying branded goods, fine dining and even buying a car.'
He also noted that young adults who control their spending from an early age tend to have a savings habit and achieve their accumulation goals much earlier than those who splash the cash about.
As young adults enter the workforce and start enjoying a regular income, having a good understanding of financial matters is essential.
While using credit cards to fuel an extravagant lifestyle is barmy, not all loans are bad.
'With a lower level of savings, young adults may wish to turn to loans to finance important life moments such as further education, a wedding and a new baby,' says Ms Karen Tan, a financial services manager at IPP Financial Advisers.
'Thus, they may need to get tips on responsible borrowing and financial management to help them start their adult life on the right footing.'
Here are some financial management tips for young adults.
1 Work out a budget
Ms Anne Tay, vice-president of wealth management Singapore at OCBC Bank, believes one of the main obstacles faced by people in debt is that they are stuck in the habit of spending more than they save.
'They may have little or zero savings left by the time they realised they have spent almost all of their pay cheque,' she says.
She advises young working adults to cultivate a proper tracking habit of how they spend what they earn. Then they will know how much there is for saving and spending.
Also, be realistic about needs and wants. If your tracking of current expenses shows that a huge chunk goes to entertainment, that is an area you can cut back on.
IPP's Ms Tan suggests setting aside an amount that you may need to finance big-ticket items and special occasions such as a car, house and marriage.
2 Proportion of savings to expenses
Most financial experts advise young adults to save at least 10 per cent to 15 per cent of their disposable income.
It is important that you practise the concept of 'paying yourself first'.
'No matter how much you owe in study loans or credit card debt and no matter how low your salary may seem, it's wise to find some amount, in fact any amount, of money in your budget to start saving every month,' says Mr Fok.
For those who may have difficulties controlling their spending, Mr Arivazhagan suggests that they consider having different accounts for their saving and transactional needs.
Setting up a Giro plan to save a specific amount on a monthly basis is a good way to enforce saving discipline. The amount can be as low as $50 and some banks offer fixed interest rates, depending on the tenure.
3 Start a financial plan early
Once savings that amount to six months of expenses have been accumulated and any insurance needs have been dealt with, young working adults should explore ways to invest the savings to generate higher returns.
Mr Arivazhagan recommends a diversified portfolio to weather the volatility and to invest in a group of funds that are diversified based on the three main asset classes - fixed income, equity and cash - and different sectors.
It is also vital to understand certain financial concepts like the relationship between risk and reward, the power of compounding and the Rule of 72, says Ms Tan.
The Rule of 72 allows you to find out the number of years it takes to double your investment, by simply dividing 72 by the potential investment return or interest rate. Suppose an investment earns 7.2 per cent interest. Then it will take 10 years to double your money.
4 Living with parents
The idea of living in your own pad and enjoying total freedom from parents may seem very enticing but unless you have deep pockets, it can be a costly affair.
Not only do you have to spend money renovating and furnishing a flat, but there are also monthly costs which many young home owners do not realise until they move into their homes. And don't forget the incidental repair bills. They all add up.
So if you are living on your own, consider returning to your parents' home. Even after taking into account your monthly allowance to your parents, you will still see immediate savings on rental, utility bills and food costs.
5 What is a good debt?
A loan can be a useful financial vehicle and is sometimes necessary, so do not always see debt as 'bad'.
Taking a loan for a responsible need like education, which can in turn lead to higher qualifications and an enhanced future income, is an example of a good debt.
Home renovation loans, mortgages and car loans are also highly useful when taken out with due care.
A key consideration, says GE Money, is whether the loan will be beneficial in the long run and not likely to leave you financially crippled and in default.
OCBC's Ms Tay advises that a person's debt servicing ratio should not be more than 35 per cent of disposable income. If your monthly take-home pay is $2,000, you should not be paying more than $700 to service debts.
6 Things to consider before taking a loan
Ask yourself this: Do I need the loan? Is the loan for investment or an expense? Can I really afford it?
GE Money Singapore suggests that to assess affordability, you need to take into account all your monthly obligations and savings targets.
'Also consider the terms and conditions of the loan, and ensure that you are able to afford all the charges and payments involved,' it said.
Another tip is to look out for loans that offer flexible payment options and that reward you for prompt payment.
7 Don't let bad debt build up
Mr Fok observes that some young adults fail to understand that debts will be a big problem later in life if they are not resolved quickly.
So if the credit card is a problem, drowning you in impulsive buys, then cancel it and use a debit card instead. You can also ask the credit card provider to restrict your credit limit to, say, one month of pay instead of the current limit of up to four months.
For those in debt, get rid of high-interest loans like credit card bills, where the annual interest can go as high as 25 per cent. If it is an overdraft problem, then clear your debt first rather than rolling it over. This is because once a debt is paid, it remains paid.
Set realistic targets or goals for yourself - such as deciding to clear your debt in, say, six months.
8 Getting assistance
If you are close to defaulting on a loan, know that financial institutions are keen to help. Don't wait until they are forced to take legal action against you.
In the case of Mrs Teo, she decided to approach her bank after four months of defaulting on her outstanding loans. After reviewing her case, the bank closed all her unsecured facilities. It then offered to consolidate her debts into one term loan, repayable within six years at a lower interest rate, which Mrs Teo gladly accepted.
lorna@sph.com.sg
--------------------------------------------------------------------------------
Lower credit limit
If the credit card is a problem, drowning you in impulsive buys, then cancel it and use a debit card instead. You can also ask the credit card provider to restrict your credit limit to, say, one month of pay instead of the current limit of up to four months.
Sep 26, 2010
Generation Debt
Survey shows twentysomethings have highest rate of loan default in the country
By Lorna Tan, Senior Correspondent
Young, married and swimming in red ink. That was the less than happy picture of twentysomething Singaporeans which emerged from a survey that tracked how people here are handling debt.
It found that those in the age group between 21 and 29 have the highest rate of loan default in the country, with married folk being the worst among them.
The plight of Mrs Teo, 26, illustrates the problem.
Mrs Teo (not her real name) chalked up more than $10,000 in credit card bills and a term loan.
Her woes started when she switched jobs and suffered a drastic 40 per cent pay cut that soon left her struggling to pay even the minimum amount required on her card bills.
There are many others like her, according to credit and business information company DP Credit Bureau.
It said defaults in the twentysomething age group grew from 5.07 per cent of outstanding payments in January last year to 7.16 per cent by December. This far exceeds the 3.11 per cent average for all consumers.
Credit card defaults were the most common across all age groups. The other debt types include overdraft, mortgage and motor vehicle payments.
The survey also found that people aged between 30 and 39 have the second highest percentage of bad debt records at 3.79 per cent. Those over 69 have the lowest rate of debt default.
Financial experts reckon young adults are in trouble because they lack discipline and have a poor grasp of financial matters. It is a common attitude among young people that saving for retirement is something only old folk do.
Mr Ben Fok, chief executive of Grandtag Financial Consultancy, says twentysomethings tend to buy things based on what they want, not what they need.
'Obviously, they cannot exercise self-control... They have not mastered the art of delaying gratification and spend more than they can afford to. Another trait is that they do not know where the money goes to,' he adds.
Mr V. Arivazhagan, managing director of regional investment and treasury products at DBS Bank's consumer banking group, agrees: 'Young adults may have the tendency to succumb to pressure from peers and indulge in expensive exploits, such as buying branded goods, fine dining and even buying a car.'
He also noted that young adults who control their spending from an early age tend to have a savings habit and achieve their accumulation goals much earlier than those who splash the cash about.
As young adults enter the workforce and start enjoying a regular income, having a good understanding of financial matters is essential.
While using credit cards to fuel an extravagant lifestyle is barmy, not all loans are bad.
'With a lower level of savings, young adults may wish to turn to loans to finance important life moments such as further education, a wedding and a new baby,' says Ms Karen Tan, a financial services manager at IPP Financial Advisers.
'Thus, they may need to get tips on responsible borrowing and financial management to help them start their adult life on the right footing.'
Here are some financial management tips for young adults.
1 Work out a budget
Ms Anne Tay, vice-president of wealth management Singapore at OCBC Bank, believes one of the main obstacles faced by people in debt is that they are stuck in the habit of spending more than they save.
'They may have little or zero savings left by the time they realised they have spent almost all of their pay cheque,' she says.
She advises young working adults to cultivate a proper tracking habit of how they spend what they earn. Then they will know how much there is for saving and spending.
Also, be realistic about needs and wants. If your tracking of current expenses shows that a huge chunk goes to entertainment, that is an area you can cut back on.
IPP's Ms Tan suggests setting aside an amount that you may need to finance big-ticket items and special occasions such as a car, house and marriage.
2 Proportion of savings to expenses
Most financial experts advise young adults to save at least 10 per cent to 15 per cent of their disposable income.
It is important that you practise the concept of 'paying yourself first'.
'No matter how much you owe in study loans or credit card debt and no matter how low your salary may seem, it's wise to find some amount, in fact any amount, of money in your budget to start saving every month,' says Mr Fok.
For those who may have difficulties controlling their spending, Mr Arivazhagan suggests that they consider having different accounts for their saving and transactional needs.
Setting up a Giro plan to save a specific amount on a monthly basis is a good way to enforce saving discipline. The amount can be as low as $50 and some banks offer fixed interest rates, depending on the tenure.
3 Start a financial plan early
Once savings that amount to six months of expenses have been accumulated and any insurance needs have been dealt with, young working adults should explore ways to invest the savings to generate higher returns.
Mr Arivazhagan recommends a diversified portfolio to weather the volatility and to invest in a group of funds that are diversified based on the three main asset classes - fixed income, equity and cash - and different sectors.
It is also vital to understand certain financial concepts like the relationship between risk and reward, the power of compounding and the Rule of 72, says Ms Tan.
The Rule of 72 allows you to find out the number of years it takes to double your investment, by simply dividing 72 by the potential investment return or interest rate. Suppose an investment earns 7.2 per cent interest. Then it will take 10 years to double your money.
4 Living with parents
The idea of living in your own pad and enjoying total freedom from parents may seem very enticing but unless you have deep pockets, it can be a costly affair.
Not only do you have to spend money renovating and furnishing a flat, but there are also monthly costs which many young home owners do not realise until they move into their homes. And don't forget the incidental repair bills. They all add up.
So if you are living on your own, consider returning to your parents' home. Even after taking into account your monthly allowance to your parents, you will still see immediate savings on rental, utility bills and food costs.
5 What is a good debt?
A loan can be a useful financial vehicle and is sometimes necessary, so do not always see debt as 'bad'.
Taking a loan for a responsible need like education, which can in turn lead to higher qualifications and an enhanced future income, is an example of a good debt.
Home renovation loans, mortgages and car loans are also highly useful when taken out with due care.
A key consideration, says GE Money, is whether the loan will be beneficial in the long run and not likely to leave you financially crippled and in default.
OCBC's Ms Tay advises that a person's debt servicing ratio should not be more than 35 per cent of disposable income. If your monthly take-home pay is $2,000, you should not be paying more than $700 to service debts.
6 Things to consider before taking a loan
Ask yourself this: Do I need the loan? Is the loan for investment or an expense? Can I really afford it?
GE Money Singapore suggests that to assess affordability, you need to take into account all your monthly obligations and savings targets.
'Also consider the terms and conditions of the loan, and ensure that you are able to afford all the charges and payments involved,' it said.
Another tip is to look out for loans that offer flexible payment options and that reward you for prompt payment.
7 Don't let bad debt build up
Mr Fok observes that some young adults fail to understand that debts will be a big problem later in life if they are not resolved quickly.
So if the credit card is a problem, drowning you in impulsive buys, then cancel it and use a debit card instead. You can also ask the credit card provider to restrict your credit limit to, say, one month of pay instead of the current limit of up to four months.
For those in debt, get rid of high-interest loans like credit card bills, where the annual interest can go as high as 25 per cent. If it is an overdraft problem, then clear your debt first rather than rolling it over. This is because once a debt is paid, it remains paid.
Set realistic targets or goals for yourself - such as deciding to clear your debt in, say, six months.
8 Getting assistance
If you are close to defaulting on a loan, know that financial institutions are keen to help. Don't wait until they are forced to take legal action against you.
In the case of Mrs Teo, she decided to approach her bank after four months of defaulting on her outstanding loans. After reviewing her case, the bank closed all her unsecured facilities. It then offered to consolidate her debts into one term loan, repayable within six years at a lower interest rate, which Mrs Teo gladly accepted.
lorna@sph.com.sg
--------------------------------------------------------------------------------
Lower credit limit
If the credit card is a problem, drowning you in impulsive buys, then cancel it and use a debit card instead. You can also ask the credit card provider to restrict your credit limit to, say, one month of pay instead of the current limit of up to four months.
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