Generation Debt

[Musicwhiz]

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
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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.

[PassiveReturns]

Be very careful and well planned before getting into debts. It is always better to have a mindset of suffering now but enjoying later.

[Musicwhiz]

Be very careful and well planned before getting into debts. It is always better to have a mindset of suffering now but enjoying later.

Yes, especially debt which is very expensive! Credit cards charge about 24% per annum and personal loans can charge up to 18% per annum. It's almost impossible to get that kind of returns consistently by investing.

Haha I guess one can perceive it as "suffer first, enjoy later"; but I'd like to think of it in terms of "delayed gratification" instead of instant gratification. By delaying your purchase of a big ticket item such as a car or a luxury watch, perhaps you can invest it and the cash flows from the investment can pay for the item comfortably in future!

[kazukirai]

The discussion on delaying gratification is actually a very interesting one. Just to share briefly on some stuff I've read.

Delayed gratification has actually been found to be a crucial factor in determining success. This was shown in "The Marshmallow Test" and has been around for quite some time. Basically, some children were given the option of (a) having a marshmallow now or (b) waiting for the tester to return and getting a second marshmallow. These children were then tracked down some years later to see how they were faring and I think it was found that children who displayed the ability to delay their gratification did better later on.

The important question of course is how can people who are naturally not able to delay gratification do so. It was found that children who choose the (b) option were not tempted so easily because they distracted themselves. I think that this can be replicated in investing as well since Investing by its very nature is in delaying present consumption for greater returns in future.

By nature, I'm one of those kids who would have chosen (a). I know this with hindsight because as a kid I would get what I wanted as soon as I saved up enough to get it. I still have my moments of weakness now and then but I find that what works for me is to have an investing plan i.e. an account purely for investing and set up so that each month a portion of my salary goes into it. And I have made it clear to all my close stakeholders e.g. fiancee, parents that I don't plan to touch this money until it snowballs into a certain sum.

That's my way. Anyone else have their own ways of delaying gratification?

[piggo]

I don't believe in delayed gratification, but instead working harder to finance stuff that brings "optimal" happiness and yet have a fixed amount of savings (which I dump into stocks) each month. If the share price drops, I'll be pressured to earn more this month and vice versa.... though I think it's workable because it's cheap to keep me happy :p

[Musicwhiz]

Hi Kazukirai,

Yes, I delay gratification quite a bit as I always hold back on purchasing items which other people may indulge in. Some examples would be cars, smart phones and expensive holidays. On my wife's side, it would be branded clothes, handbags and shoes.

We stick to public transport (and my trusty bicycle), a plain vanilla mobile phone with no internet connectivity and at most go for holidays at nearby destinations (e.g. Malaysia, Thailand). My wife sticks to bargain and value purchases for clothes ($10 - $20 range), with shoes which cost in the $20-$30 range. Handbags never cost >$100 and are usually simple in design.

The method of delayed gratification is to ask yourself if you truly need the expensive stuff; or if you can make do with cheaper alternatives without compromising your quality of life too much. Take for example transport - with such a good network of MRT/buses, we can literally go most places we want; and a cab will suffice if we want to go somewhere further. Since I don't need to be connected to the Net 24/7 and don't need music and photo-taking on a phone, I stick to my plain vanilla mobile phone. Life is simple and uncomplicated and I enjoy it that way.

To piggo:

Since you say you don't believe in delayed gratification, does it mean you have many instances of instant gratification? Perhaps you can share with us more on such examples and also your philosophy for spending money? For me, I do save 50% of my take-home salary every month as well, but at the same time I invest whenever I can to grow my money.

Thanks!

[momoeagle]

I wonder why pple my age are facing such debt problems. I seriously cannot comprehend.

Eventually, I would probably still want to own a car for its convenience, but not at the expense of denting my rate of networth growth.

Money earned is to be spent eventually, not money not earned yet should not be spent at all. There's actually no point to be a millionaire scrooge.

[Musicwhiz]

It could very well be the case where cheap and easily available credit have "ensnared" an entire generation. Credit cards were not very prevalent when our parents were teenagers and young adults, so the proliferation of such easy credit only serves to fuel the growing demand for instant gratification and to subconsciously inculcate a "spend first, think later" mentality among the young working adults today.

In fact, only those who have been through crises or hardship in life (e.g. illness, retrenchments, pay cut etc.) will understand the value of money and adjust their lifestyle accordingly to cut back and save/invest for a rainy day.

Of course I agree money is earned in order to be spent for enjoyment, relaxation and stuff like good food! What we have to do is to ensure we always save a portion (at least 10%, 20% if possible) of our take-home salary in order to grow our savings. This helps us to build an emergency fund for rainy days like recessions and downturns, and also preps us to take advantage of juicy investment opportunities.

Sadly, the youths today may never fully understand or appreciate this concept, as they are increasingly leveraging to the hilt in order to enjoy their branded goods, gadgets, expensive holidays, cars and other "bling"

[momoeagle]

Musicwhiz, while that could be true, I really wondered whether the article is writing for the sake of generating news to be read, or if it is really true.

Most of my friends who are around my age group do not have such problems with debts. They may be out of job, they may be studying or they may be working just like me, but none of them has debt problems as mentioned in the article.

I'm inclined to believe that only a very small number of youths are leveraging to the hilt for their branded stuff and luxuries. The news article dramatized it so that it is as it is, news.

I'm perhaps on the extreme end of saving percentage for my age group, so I do not take myself into comparison at all.

[Musicwhiz]

Musicwhiz, while that could be true, I really wondered whether the article is writing for the sake of generating news to be read, or if it is really true.

Most of my friends who are around my age group do not have such problems with debts. They may be out of job, they may be studying or they may be working just like me, but none of them has debt problems as mentioned in the article.

I'm inclined to believe that only a very small number of youths are leveraging to the hilt for their branded stuff and luxuries. The news article dramatized it so that it is as it is, news.

I'm perhaps on the extreme end of saving percentage for my age group, so I do not take myself into comparison at all.

Haha Momo, yes you could well be very right! After all, what's good journalism if it does not pique your interest and elicit a strong emotional response? Of course, one must balance proper reporting with sensationalistic reporting (a.k.a. The New Paper!); but in the case of the Straits Times I think they have an adequate balance of both. Or do they?

With regards to the friends around you, perhaps I should hazard to ask - do you know their TRUE financial situation? Most of my peers and friends only give me snippets of their financial situation, and as d.o.g. mentioned one can deduce their expenses, assets and liabilities from their lifestyle habits to a certain extent (e.g. car, condo, branded goods?); but it still may "hide" a lot more "dirt" than what can be seen on the surface.

Another possibility is that you may be mixing with a group of friends who have similar character/disposition and spending habits as yourself. The proverbial "Birds of a Feather Flock Together", hence the sample is not representative of the population at large for your age group.

Yet another possibility is that the sample size of your friends is simply not large enough to be representative; or they may be of a certain profession (e.g. engineers or IT) so the population is skewed. [I guess I am biased against bankers as I know quite a few and some do have profligate habits!]

Of course, assuming all of the above are filtered out, it could still very well just be a sensational journalistic report!