MoneySENSE 2: Credit Management

10 06 2009

Inability to manage credit properly can lead to serious repercussions. Imagine that your friend is in heavy debt, like one of those mentioned below. The following scenarios are taken from The Straits Times article, ‘Take cautious line on credit cards’:

Scenario 1:  A 27-year-old I met recently at CCS had amassed credit card debts of $58,000 within a year, including $8,000 in interest. He had a dozen different credit facilities.

Scenario 2: An administrative assistant with a predilection for Prada purses turned to a voluntary welfare organisation to seek help with childcare fees when her husband divorced her and refused to pay her credit card bills.

Scenario 3: Another 36-year-old mother of two continued to spend the usual $500 a month on beauty treatments even after losing her job in April this year. She now has debts of $52,000, some of which stretch back to 2002.

How can you help him/her get out of debt?

Also, do you think we should save before we start spending, or save after we have spent? Why?

                                                                                                                                              
Suggested Readings:
– ‘Take cautious line on credit cards’. The Straits Times. 3 December 2008. <http://www.cpf.gov.sg/imsavvy/infohub_article.asp?readid=%7B699377036-1139-1477891206%7D>.
– ‘MoneySENSE Worksheet on Borrowing Money’. MoneySENSE. March 2006. <http://www.moneysense.gov.sg/resource/publications/guides_publications/Borrowing%20Money.pdf>.
– ‘Dealing with Debt’. MoneySENSE.  December 2003. <http://www.moneysense.gov.sg/resource/publications/guides_publications/Consumer_Portal_Dealing_With_Debt.pdf>.

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33 responses

10 06 2009
Nicholas/DHS/DHS01

I would advise them to first terminate all their credit cards and other credit facilities, unless it is truly necessary i.e. facilitate cash flow of business . Alternatively, for day-to-day spending, use debit card, a good credit source whose credit limit is limited by the amount of money they have transferred in. They can overspend and end up in heavy debts because they have easy access to credit. So once these credit facilities are removed, they will not be able to accumulate more debt and now they can focus on clearing the current debt which they owe.

Next, plan their budget monthly. Allocate money to different categories of expenses such as food, transport, house loan servicing, car loan service, entertainment, clothing, others. PRIORITISE expenses is the key issue here. Always give priority to servicing of loans and necessities such as food and transport. As they are heavily in debt, they should cut down on daily expenses with cheaper alternatives such as eating at cheaper place and avoid their unnecessary expenses such as entertainment and leisure activities. Instead, use bulk of the income, after deducting the necessary expenses, to service the credit card loans. Credit card’s compounded interest rate is just way too high! Repay the loan asap before it snowballs further. Yes, this means a BIG change in spending habits and lifestyle. The Prada fan should stop buying luxury goods and use the money to repay her credit card bills. And she should also make sure that she has enough money to cover the childcare fees, if it is truly a necessary expenditure because no one is free to take care of the child. The 36-yr-old mother should stop spending on beauty treatments, especially when she does not even have an income now! She should instead go out and find a stable job as soon as possible. There is no way to get out of debt without a steady income. Self-discipline is the key to getting rid of debt!

They should contact their creditors immediately and work out a manageable repayment plan. They should speak to the bankers and credit card issuers regarding the repayment. Always be proactive and address the debt problem immediately to stop it from worsening. They should always repay the high interest debt first, that is credit card debt which has a whopping 2% monthly interest rate. If they are eligible for balance transfer by any financial institutions, transfer the debt with high interest rate to cheaper alternatives. This makes repayment more manageable.

Also, they should sell off any valuable items such as jewelry and luxury goods or unnecessary big ticket items away such as a second car. There is no point holding on to these items when the debts are snowballing by leaps and bounds every month. Within months the interest may be more than the actual value of these items. So might as well sell them off and use the money to repay the loans and reduce the loans. Also, if they really cannot service the loan and has to file for bankruptcy, these items will be sold away to repay the loan anyway.

If they really do not have the ability to service the credit card debt fast enough to repay it entirely, unfortunately but also deservingly, they should file for bankruptcy. They must also satisfy the eligibility conditions for bankruptcy. The Officer Assignee will help to sell away the assets and facilitate the repayment of the loans.

10 06 2009
Javier/DHS/DHS01

Do you think we should save before we start spending, or save after we have spent? Why?

The benefits and costs of saving first or spending first are somewhat simple. For the former, it removes the need for us to worry about whether we can afford the things we purchase. Future risks of unemployment that leads to unstable income are also brought out of the picture. Even though this is the safest and most reliable method to make purchases, not everything can be bought this way. An average consumer will probably not be able to save for big ticket items like cars and properties. For the latter, it allows us to enjoy the satisfaction of consuming even before we have the means to afford it. Like mentioned above, it may be the only way for people to buy cars and houses. However, it is not hard to realise that they are just actually spending money that is meant for the future.

Immediately after looking at the three frightening cases in the blog post, I was naturally inclined to support the stand of saving first before spending. But on further thought, I realised that it is not possible to just save before making all kinds of purchases. There should be a balance between both. So the question now is: when should we spend and when should we save?

Looking at the three mentioned cases, they are obviously spending way above their means. They overly indulged in unnecessary items and showed a lack of self discipline and control. I feel we should always use savings to fund for things that do not exactly need. Luxury delicacies, branded apparels, leisure products are just some examples. These items are the usual culprits that created unimaginable debts that ruined people’s lives. On the other hand, borrowing money to spend on things like education, shelter or transportation is justifiable. These items are necessities and they usually cost too much to pay in one shot. Moreover, most of them (with the exception of motor vehicles) are types of investments that may allow higher returns in the future.

All in all, it actually all boils down to spending within what one can afford. It does not hurt to use credit to pay for a dinner or some apparel. If one knows what he can or cannot afford, he should not face similar problems.

“Let us not bankrupt our todays by paying interest on the regrets of yesterday and by borrowing in advance the troubles of tomorrow.” -Ralph W. Sockman

10 06 2009
Tommy/DHS/DHS02

I shall post a politically incorrect answer. This post will be quite uneconomical I think… haha, from the terms I use.

Last time, my teacher told me this story…

There were 2 women, a Westerner and an Asian. The Western lady bought a house in her thirties and paid installments slowly and finally finished paying finish by her eightieth birthday. She died one week later after enjoying the comfort of her house for 50 odd years.

For the Asian, she started working and scrimping and saving from thirty years old and she is finally able to buy the house at her eightieth birthday! She is so very happy! She died one week later. Only living at her newly bought house for a week or so.

Most people would say things like saving first then spend your hard-earned money blabla. But with so much available credit around. Why not utilize them? That’s why I feel that you should save after you have spent! Then you can enjoy the thing that you have bought and at the same time, pay for the thing itself, as illustrated by my small story above!

Hope this post is concise and refreshing for you all 🙂

10 06 2009
Lee Jun Hui/HCI/Team 9

Indeed a concise and refreshing post which offers an opposing viewpoint.

I’ll keep my reply short. With regard to the second question on whether we should save before we start spending or save after we have spent, I feel that actually it doesn’t really matter which comes first; it’s really like the cliched chicken-and-egg question.

What’s more crucial is that one spends within his means. By this, I mean a balance between saving and spending, as what Javier has suggested. But I have a question for Tommy. Going by the ‘moral’ of your teacher’s story, yes, we can theoretically save after spending to avoid the debt trap, but the more important question is: how many of us truly have the self-discipline to do that?

So, for me, I’d still prefer the tried and tested saving-before-spending approach in managing my finance. But, of course, I’m prepared to make an exception for things like education and housing.

11 06 2009
LIN BO/VJC/VJC005

thank you for the interesting story.
plan carefully and bring forward certain consumption indeed can give us more satisfaction, providing that the borrower work hard to earn a steady income. however, there can be external factors that are beyond one’s control, like the current financial crisis, like say you loss your job or your house becomes worth less than your loan etc. that’s why plan carefully is important, especially before entering long-term debt commitment like a house mortgage.
however, for those yound people mentioned in the article, i think they all believe in “bring forward consumption creates great satisfaction” without careful planning. once planning and monitoring are absent, debt went out of control easily. so i think to help young people prevent debt trap, schools really need to educate them about fbasic inancial planning stuff, probably before they graduate.

23 06 2009
Chng Wei Yang/HCI/Team 5

Regarding Tommy’s story, I think that we have missed out a crucial point.

Even though the Asian saved up some money by not having to pay interest on the mortgage compared to the Western Lady, where did she live when she did not own a house? If the Asian Lady rented an apartment, the accumulated rent for the many years would have easily diminished any savings made by paying the house in full.

Furthermore, we have to take into account the inflation. Assuming that the price of property appreciates a rate of 4% a year and that the Asian Lady saved for her house for 60 years more than the Western Lady. If the houses that they bought were comparable and the Western Lady bought it at $100,000, then the Asian Lady would have to pay 1.04^60 *$100,000 = $1,051,962 for her house. Even after subtracting the mortgage payments made by the Western Lady, the Western Lady would most probably have saved more in the end and enjoyed a more comfortable life over the years. Housing, unlike other goods like automobiles, are a good investment because they appreciate substantially.

10 06 2009
Jennifer Wu

Other than the points mentioned by Nicholas in helping the abovementioned cases get out of debt, I feel that education about debt management as a long-term strategy is also extremely important. In order to entrench the ‘save before spending’ perception in the values of society, it is vital to have the necessary structure and helplines in place for debtors who are trying to kick their habits of spending on credit. A comprehensive package can be designed and readily available for anyone who needs help in this area. In order to effectively engage the attention of society, the influence of new media can be used to reach out to the masses, especially those in the 20s or 30s (who constitute the largest percentage of those in debt). For instance, the online game ‘Bad Credit Hotel’ that the US Treasury Department launched recently is a good example of a medium through which the basics of good credit can be taught.

In paying off the debts, a effective and proven strategy called the ‘Debt Snowball’ can be employed. This has been recommended by recognized financial experts such as Dave Ramsey and The Motley Fool, as it substantially expedites the process of paying off debts. The gist of this strategy is to start paying off the debt with the highest interest rate (minimum payment and extra money made available from budget) while only paying the minimum portion for all other debts. Once the debt with the highest interest rate is paid, the money used to pay for this can be diverted to the debt with the next-highest interest – and so starts the process of ‘snowballing’ the debt. (For the details, please refer to http://financialplan.about.com/od/creditcarddebt/a/DebtSnowball.htm).

Ultimately, the best scenario is to avoid any credit card debts. In order to prevent people from raking up such massive amounts of debt, banks should be more cautious in extending credit, especially to those with continuous bad credit histories. Furthermore, the fact that there is no limit on the number of credit lines that one can have compounds the problem. Perhaps there can be a cap on the overall amount of unsecured credit a borrower can get from all banks nationwide, judging by income levels and considerations of past credit histories.

10 06 2009
Jennifer Wu / HCI / Team 9

So sorry, didn’t put in the team name just now…

10 06 2009
Jamie Pang/HCI/Team 6

To be entirely honest, I think credit management and spending is something we all intuitively know. It’s common sense! You spend what you earn. If things get out of hand, it’s because people are ignoring what they do know and going ahead with their ‘predilections with prada purses’ or their obsessions with beauty (honestly $500/month on beauty treatment). Of course, if you’ve got the money, that’s not an issue. But if you do not, then maybe common sense should have knocked in earlier before the debt started accumulating.

To answer the question: sometimes, I think education and the fancy debt management plans may not be that effective. These people just have to learn what it’s like to be a bankrupt and experience the restrictions of movement before they start thinking about what they do know – AND applying it. There, that’s my solution. Let them fall into the black hole so they never get in again.

Radical, I know (:

And, on a separate, more academic note (I hope), it seems as if the savings-investment diagram would tell us that given a fixed level of investment, an increase in savings would reduce equilibrium national income (think about the savings curve shifting left). I’m not too sure how desirable encouraging people to save money therefore is, especially for Singapore where our saving rate is insanely high. The paradox of thrift, as we all know it.

10 06 2009
Chua Xin Rong/ HCI/ Team 1

One day, your friend gives you a call and tells you that he/she is going bankrupt because he/she overspent on a flashy sports car or bought Prada handbags uncontrollably, or whatever. This friend then goes on to invoke all the happy memories that you have had together, starting from when you crawled together as babies to when you all exchanged pledges of friendship and cried in each others arms at prom. And at the climax, he/she says, “Please lend me $10000”.

How easy would it be for you to tell him/her to get lost and become a bankrupt because he/she definitely deserves it?

To some extent, I think this is the perceived safety net that some hold. The ‘Prada lady’ might have assumed that her husband would pay it off, given their matrimonial bond, or perhaps the interests of their children, or perhaps as an issue of face.

10 06 2009
Chua Xin Rong/ HCI/ Team 1

That said, I agree that this is largely a matter of the mind. University graduates are falling into this trap as well, and I’m quite sure it’s not because they can’t calculate compound interest.

Therefore, in the case where my friend has ended up in this situation and I felt obliged to help him/her, I would do it with an eye on the psychological factors behind his/her overspending. In such a case, a careful analysis of these factors might be beneficial, as hopefully this knowledge will help him/her understand what is behind these impulses and how to better control them. eg if this friend is an inveterate gambler who simply likes the ‘thrill’ of winning, perhaps this friend could be persuaded to play against a separate account set up for gambling purposes.

One method I do not believe in is simply lending him/her sufficient money to pay off all the existing debt. Even striking the lottery does not make one rich in the long run. It is estimated that 70 percent of lottery winners will squander away their winnings within a few years. Their stories can be summed up in one line: They didn’t mange their money properly. Point being, quite simply, that all the money in the world isn’t of much use if the recipient won’t use it properly.

Please see http://articles.moneycentral.msn.com/SavingandDebt/SaveMoney/8lotteryWinnersWhoLostTheirMillions.aspx and http://www.helium.com/items/844411-a-look-at-famous-lottery-winners for more details.

11 06 2009
Goh Zuo Qi/TJC/Scimonoce

It is easy to preach ‘save before you spend’ but as can be seen by the scenarios posed, many people are finding it hard to limit and control their wants. Fundamentally ,it boils down to the individual choice of choosing to spend on needs or wants. It is crucial to be able to separate the two groups in order to use your income wisely and to get out of debt!

Prada bags, beauty treatments are WANTS. Once these people are able to identify this, and hence streamline their spending, they will be able to embark on a sensible saving plan.

Credit cards are very lethal especially to those who cannot separate their wants and needs. Personally, i would think that to get out of their debts, once they realise and admit that they cannot trust themselves and that they have a spending problem, they should give up their credit cards because using cash would heavily impede them from spending on luxury, expensive wants like branded bags.

Lastly, saving after spending cannot be a wise option. You are essentially spending your future expected income, it is dangerous to do so especially if you know you cannot control your spending and/or do not have a very secure income. This can only be justified if you are certain about your long term job security and on items like property (e.g. HDB) where you pay monthly installments.

11 06 2009
Enqi/ RJC/ The classicals

It’s not a question of whether we should save before or after we spend, but which a more effective way of reaping the most benefits (short term and long term) from the situations we face, and whether the degree of spending before we save would be sustainable. The concept of discounting reflects the fact that we tend to treat costs and benefits in the future as being less important than costs and benefits now. This pretty much explains why many would choose to enjoy the benefits of goods now, and bear the cost of it later on. A unit of money in one year’s time will be valued less highly than the same unit now (excluding inflation). I agree with Javier that it isn’t practical to assume that it is possible to always save before we spend, as there are benefits to be reaped from spending on a big ticket item or other long term investments that may incur debt but subsequently brings us benefits that can offset the opportunity cost of borrowing money, for example, an educational degree, or even a washing machine at half price during the GSS. The fact of productivity of capital, that if we choose to invest in a machine it will tend to yield a flow of services over time with values higher than the cost of our investment, does give incentive for people to use their credit cards and “spend before saving”.

If the positive discount rate is eliminated (although it is almost impossible), debts may be reduced. And planning should be done on ways to finance a debt as soon as possible, to reduce the cost of the loan thus gaining maximum benefit. However there are also cases where spending before saving is not well justified, especially on luxury items which does not increase the productivity or utility of the individual significantly, like beauty treatments.

Unfortunately, as for helping debtors in those 3 given cases, there may be no one-size-fits-all way to solve the problem. Changing and improving on spending habits is the key, and regular supervision may be needed by higher authorities.

12 06 2009
Kwok Ci Yi Jonathan/TJC/Economatrix

All of them showed lack of self-control not to overspend, overestimated their financial capabilities to repay their loans and have an intrinsic lack of financial planning. So the solutions to getting them out of debt should revolve around these 3 points. Firstly, they should not be allowed access to credit (whether self-imposed or by credit institutions), secondly they should ensure that they obtain a stable source of income to service their debts and sustain a frugal lifestyle and thirdly, they ought to channel their monetary sources appropriately.

Given the large outlays of big ticket items like apartments, cars, it is less likely that one will consume a large number of these itmes. These items require a long period of time to accumulate in sum and are paid usually through instalments. Hence, it is undeniable that such items should be purchased and paid for via instalments, albeit taking into account of interest rates. It would absurd for one to save the sum of money to purchase a big ticket item given his limited short term financial capability. A point to note is that spending before one save does not mean that one should forgoe planning before purchasing. This is evident in the period of time when many automobile companies offer a deal to consumers in driving away a brand new car with just an initial downpayment of $1. These deals result in many Singaporeans who do not have the financial capability to service their loans to own such items given the huge initial entice.

However, for small credit items, it is advisable to save before spending because the loans chalked up by each of such items is small and easy to overlook. Hence, it is easy to accumulate such loans, causing them to snowball into a heavy debt, as shown in the three cases, considering that there is a possibility that we do not have sufficient self control for our spendings.

13 06 2009
Jeremy/NJC/NJC01

Let us explore the various permutations of the question: ‘do you think we should save before we start spending, or save after we have spent? Why?’ Personally, I think the question per se does not allow for the possibility of both saving and spending at the same time as it has only accounted for the situations in which saving is done before spending and vice versa. It is possible for one to spend less than what he saves in a month and this still shows financial prudence. Even if one’s expenditure in a month is more than one’s savings for a particular month, it can still make financial sense, as long as his income is more than enough to compensate for the spending. It is noteworthy to realise that saving is still part of the equation and both spending and saving complement each other. Hence, it is essential that one saves. The amount is up to the individual’s liabilities but as a rule of thumb, a third of his income will be good and six months’ worth of income should be set aside for rainy days (according to a financial literacy teacher). But does this mean he cannot spend any of this money? Of course not! After setting aside a certain amount for daily essentials, the remaining can be spent too.

With regards to the other question (i.e. How can you help him/her get out of debt?), I propose the following: Firstly, the people who are in debt will have to acknowledge that their spending habits have to change and steps have to be taken to clear the mounting debt. The debtor must also have the perseveration to continue with his downsizing plan. The movie ‘Confessions of a Shopaholic’ clearly shows how the absence of motivation to ‘quit’ shopping, i.e. buy unnecessary goods, can lead to catastrophic consequences. The protagonist was an ‘addicted shopper’ and despite attempts to change (one of the more dramatic and hilarious attempts was to freeze her credit card in a block of ice so that she would not use it), she became worse as her debts mounted. While some may dismiss this as Hollywood fluff, I believe the message which the movie intends to convey is reflective of a growing phenomenon in developed and consumerist countries worldwide. Similar to drug addicts and smokers, unless the person wishes to change, efforts undertaken by others will usually be futile.

14 06 2009
Lim Kia Yee/HCI/ Team 1

For the second question (about whether saving or spending should come first), I think that the above comments have overlooked a major point. The fact is that most goods (not only big ticket items) lose value over time and rapidly become superseded by new developments. Take the ubiquitous computer. Over the span of less than 3 decades, the formerly cutting edge home computer in the 1980s was rendered obsolete by personal computers and desktops, which in turn are now facing stiff competition from laptops. This presence of better substitutes in the future devalues current consumption. Afterall, why buy now when you can save up to buy better quality goods in the future? In essence this is the dilemma between current consumption and investing in future consumption. So what is one to make of all this? I think that a distinction should be made between wants and needs, which Javier has brought up implicitly earlier. However, the line between these two extremes is a fine line indeed. Personally, I would find that while it is important for me to have a roof above my head, it is totally unnecessary for me to own that roof (i.e. Renting is a good substitute), which most probably disagree with. Thus, really, there is no standard answer to this question, as your answer to this question heavily relies on your definition of a need.

17 06 2009
Sheena Soh / VJC / VJC012

for the economy: debt=money
for the individual: debt=opportunity

Answers for Scenario 1, Scenario 2, Scenario 3:

they don’t learn their lesson or reckless spending, don’t they? cut the credit. simple. provided if they want to. help if you think help is worth being given (compared to others outside who REALLY need your help)

the problem of saving before you spend from a macro view is that, the global economy would eventually go into a halt if everyone does that. someone must start the spending eventually or mass deflation will result, which is according to economics theory, bad. that’s why keynesian economics fiscal policy is on the headlines these few months.

from a personal point of view:
one must ask this qn: is it worth it? if yes, go ahead
people are subjective. you cannot place a fixed value for a particular good they want to obtain. if they think being in debt is worth it, so be it.

if using debt to invest, eg. margins in shares, ask thyself: are you paying a high price for something that should be lower in price?

if using debt to consume current goods, ask thyself, is my current consumption worth the future debt with interest and my interest forgone?

therefore, it is again, the key phrase: opportunity cost.

18 06 2009
Ze Ming / RIJC / TTWW

I agree with the kia yee, but I think there’s two things that one should always note when taking a debt, else the debt should not be considered.

1) Will I make more money out of the money that I borrow? (i.e. 10,000 borrowed becomes 20,000)

2) Will I at least be able to pay back the money I borrowed with the item that I bought? (i.e. buy a house for 600,000 , it’s at least worth 600,000).

I’m going to extrapolate this to the United States economy. They’re borrowing, and spending, and because of that consumer mentality they’ve got little concern for the repercussions of such spending. I doubt the money borrowed would pay back itself in the future. Is that good management?

Yet countries still buy US treasury bonds.

Just a little food for thought:

If you owe the bank just a small sum of money, you’ll be scared of the bank and what he’ll do to you. If you owe the bank a huge huge sum of money, the bank’s scared of you and what you’ll do to him.

Is that what the United States is doing now?

19 06 2009
LIYUAN, SHARRON/JJC/SPECTRUM

With reference to the second question, I hold no absolute stand of whether saving prior spending or spending prior saving. Long-time devotion to any of the two spending practices brings about unfavorable endings as reflected by the story mentioned by Tommy. Many a time, both practices necessarily happen, be it regular payments from salary or housing loans. What truly matters in credit management is not just spending on what you can afford or within your means but disciplined spending that fulfills your financial plan and goals. Affordable buys may cost more than their price tag values with large and expected future spending ahead. Then, it is only logical to save before spending to ensure our current spending don not jeopardize future plan. On the contrary, one can spend a bit more if he is comfortable in his current financial status and have little burden on settling his future payments. Only with proper financial planning can we weigh the opportunity cost of spending to decide our spending practices.

21 06 2009
Wong Theen Yew/ TJC/ Team Patrick

To save all three of them out of misery, the first thing we can do is to get them to attend a counsel by the man who lost millions but survived until today. Unfortunately, I forgot his name.

The only problem with all three of them is their spending habit and they are confused between wants, needs and artificial needs. To get out of their debts, they will have to start saving, working, invest smartly or if circumstances allow, take the easiest route, marry a rich partner.

That links us to the question whether to spend first or to save first. Well, to save before we spend is being conservative and can ensure that we won’t get into a financial crisis. To spend before we save can be seen as entrepreneurial . My verdict is that we should not spend beyond our means but at the same time, spend when we can see the potential returns, in other words worthy investments.

To conclude, if we have a sum of money, save some as our financial back up, invest smartly and we will be able to earn money using money.
Of course, all these come with experience and foresight.

21 06 2009
gabriel/sajc/nineteeners

Should we save before we spend?
Or spend before we save?
Well, it depends on how long more you have to live right?! XD

but personally, i feel we should save before we spend, and espicailly since being inculcated with this asian mentality. we should have enough assets for the future, for our future generations, before we satisfy ourselves in the present. pragmatic heh!

so don’t forget this important virtue. save before you spend!
see what happens if you don’t!

22 06 2009
gabriel/sajc/$ensibilities

sorry, its team $ensibilities

22 06 2009
Marcus Ng/ SRJC/ M3

When you get in debt, you have mortgaged your future, as straightforward as that.

Spending before saving may be a better choice. Don’t get me wrong, savings is also important in giving us some assurance. However, instead of findings methods to curb your spending, it is sometimes okay to spend more in the short term if you are saving in the long term. For example, a person might use credit cards to spend on a certain goods and services however he may get back cash and product rebates, Furthermore, they get to enjoy special privileges and ultimately saving more as compare to depositing their saving in banks where interest rate are commonly less than 1%.

For instance, if you deposit $10000 in POSB, you will receive an interest of $25 per annum. Alternatively, if you spend $10000 on a travel trip and the credit card offers you a discount of 10%. You will save $1000. This demonstrates that there is a higher opportunity cost incurred in saving in a banks then getting rebates from spending through credit cards. Hence ultimately you save more while enjoying more services. So we should spend before saving in the long run.

22 06 2009
Shang DianJun / HCI / Team 1

The above discussion has revolved pretty much around the debtors, talking about how their extravagant purchasing behaviours should alter and how they should compromise their lifestyles (which they are so used to). However, we have overlooked, perhaps, the responsibility of the creditors, particularly, the banks and financial institutions that provides such credit facilities which got our friends into trouble.

I understand from my personal experience (yes, I tried.) that in order to apply for a credit card (which ‘our friends’ in the blog post were using), there are seemingly stringent criteria to be fulfilled by the applicants such as minimum annual income, stable employment, etc.. Various documents are required to support your application such as payslips, income tax notice of assessment and CPF statement. However, this is not that difficult after you have gotten yourself employed. NOT AT ALL. Such easy assess to credits allow our friends to go on their happy shopping spree. Just like in the film “CONFESSIONS OF A SHOPAHOLIC”, the main character, Rebecca Bloomwood, managed to have 12 credit cards and couldn’t help herself but to spend on every fashionable piece and indulge herself in a wonderland of luxury. Who is to blame?

I agree in principle that these people who got themselves in debt should be penalized for their unwise decision when spending away their future income (which may not exist at all in the case of retrenched 36-years-old mother). Their uncontrollable spending habit has definitely taught them a lesson. However, the banks that issued them the credit cards should be reflecting on their own system as well.

It is vital that we do realize that all credit card-issueing companies in general are into intensive marketing spree targeting a specific group of potential customers by creating a sense of status and achievement in the minds of this group by owing the credit card offered by them. Look at the brochures you can find during banks’ road show: “VISA Platinum”, “Gold Credit Card”, “Premier MasterCard Credit Card”… They seem to suggest an overwhelming sense of superiority which one couldn’t resist.

The tricky part is that after your successful application, your financial circumstances is hardly reviewed again unless you start to pile up your late payments. and even if you start to owe them some, they are not that eager to force to terminate your credit card. They have faith in you, alas! However, it is in their action that our friends saw the chance of continuing with their spending. Mounting up your debt up to $58000 doesn’t seem like a problem to the banks.

In my humble opinion, it is essential that banks review their customers’ financial status once a year and pay particular attention to those who is not keeping up with payment. In this case, our friends would be prevented from getting into heavy debts and the banks is happy that they do not have any bad credits issued. Win-Win situation, isn’t it? Though admin cost may be incurred, a cost-benefit analysis will prove this a worthwhile attempt.

23 06 2009
Ang Wei Sheng/VJC/VJC010

All three person mentioned had the same problem: they bust their credit line more than they could well afford with their then financial abilities. What they could do now is to stop using the credit cards to make any purchases, that is if the bank/card issuer still deem them as creditworthy despite their debts. Alternatively, if they do not wish to terminate the cards, they can choose to stash the cards at home instead of bringing it out to shopping centers, this way, they will be less tempted to spend using credit. However, this is not advisable as for most cases, there is the annual membership fee, which can come up to hundreds of dollars, which would be much better put to use by the three of them by paying off their installments.

Next, they could go to the many voluntary organizations in Singapore to help them pay back their debts, as in to structure out a plan so that they can pay off their debts while carrying on with their respective lives. Filing for bankruptcy should always be the last option as being a bankrupt tends to lead to many restrictions laid down by IPTO and the Official Asignee, causing much problems in their lives.

In conclusion, best option: terminate the credit cards, approach CCS and pay off your debts. Besides credit cards, there are always debit cards and normal ATM cards that you can pay for purchases via NETS, where you don’t incur any fees (for most cases, except taxi, etc.) and the shops have to pay instead to NETS for using their services!

23 06 2009
Chng Wei Yang/HCI/Team 5

I believe that credit cards are not all that bad if we are able to utilize them wisely. Credit cards give us much convenience and sometimes even discounts from many shops. For example, some credit cards such as the Esso-DBS MasterCard gives discounts at Esso Petrol Stations which can save up hundreds of dollars per year.

However, the high-interest rate coupled with the high credit limits (several times your monthly income) is a deadly combination. It entices you to spend over your financial capability and results in huge amounts of debt.

But I believe that it is not all that difficult to minimize your debt. The key is to transfer the debts with high interest rates, say credit cards and car loans, to those with low interest rate such as mortgages. If for example, your credits card debts amount to $10,000 at 24% interest per annum, taking out more mortgage (say at 8% interest) to repay your credit card debts will result in savings of 16% x $10,000 = $1600 per annum. This would be very useful in reducing one’s debts.

23 06 2009
Julius Eleazar Tan/NYP/TeamB

It looks like the severity of their debt problems are increasing per scenario.

In my opinion, when dealing with debts:

Step 1: Stop accruing debts for anything other than daily necessities (i.e. food, transport). Then sit down and organize all your bills in front of you, you can do this on a large table but the floor is also recommended. Now before you attempt to take your own life staring at the huge pile of debt before you, take a moment to calm down and relax. Deep breaths.

Step 2: In your current desperate state, you should have no problem begging, which sets you up nicely for what you are about to do: Call all your creditors and tell them about your debt problem, beg for as long an extension as you can. Most of them should be understanding and show you a little leniency. Now take some paper and jot down the deadlines for each debt and the associated consequences. It would be good if you could make this into a graph or chart in Microsoft Excel.

Step 3: Now that you have your chart. Split the debts into two different types. The first one would be the high priority debts you should pay off as soon as possible such as taxes, court fines, utility bills and mortgages/rent. The second one would be the lower priority payments such as credit card debt, bank loans and loans from family.

Step 4: Pay off the high-priority debts according to which deadlines are coming first and which consequences are most dire.

Step 5: Once you’ve paid off your high priority debts to a sufficient level, target your lower priority debts which generate the most interest, you should pay these off first, along with the debt interest.

For Scenario 1 and 2: They are not in that bad a shape as both still hold a job. I suggest following the above steps. Both should stop buying whatever it is that is causing them to be in debt be it Prada bags or whatnot. Then they should lay out all their bills in an orderly manner and call their creditors up for extensions. After making the chart that arranges them in order of priority and deadlines as well as consequences, pay them off in that order.

For scenario 3: My, this is a nightmare situation for anyone. My suggestion would be to find a job as soon as possible and try to pay off her debts in order of priority. If this isn’t possible then she may have to file for bankruptcy and accept the consequences.

If she chooses to persist without filing for bankruptcy, she should make sure that her children go through school whatever the means necessary because education is the most important thing she can give them and it can eventually get their family out of debt.

As for whether we should save before spending or spend before saving, I believe that everyone should save up to a certain amount that will be stashed away for times of emergency. After we have a sufficient “emergency fund”, we should then set aside a good portion of our money first and then budget and spend the rest. This may sound too conservative but if you think about it, we humans have unlimited wants. We will always want something newer, better, faster, more fashionable. And if we have the money then we will spend it one way or another.

I have never believed in the saying “let’s just be content with life” because frankly, we are never content and we should never be content if we want to remain competitive. Sadly, an evil that comes with being competitive and striving to be the best is having rewards waiting for you at the end of it all, be it a new car, house or watch. Some may say that people do it for the sense of motivation and accomplishment. But nowadays, what is that sense of accomplishment and satisfaction represented by? Material goods. I’m sure that there are a handful of people in the world who are exceptions, but for most of us, this is reality. And one way to counter this intrinsic propensity to get the best and the newest is by putting aside money first and then spending what you can afford to spend.

23 06 2009
Tan Jun Wei/DHS/Team 5

When dealing with the question of whether we should save before we start spending, or save after we have spent…

In my opinion, there is no definitive answer to this question.

While I do realize that most of the comments posted on this topic has provided prudent solutions to this dilemma – most are something along the line of weighing the material costs and benefits of saving first or spending first, then making a rational decision – I think we have to factor in the opportunity cost of taking time to make such a decision. How much effort does one have to make and how long does one have to take when making such a decision, considering the information imperfection in the real world and the growing unpredictability of the future? Using the marginalist principle, perhaps one would, find the marginal cost of doing a cost-benefit analysis (finding out about and factoring in ALL the marginal costs and benefits of spending first or saving first) would outweigh the marginal benefit of doing so, and therefore make a rational decision to not do the cost-benefit analysis in the first place. Furthermore, if, as Herbert Simon has proposed, people are only “boundedly” rational and make decisions by “satisficing” – choosing what might not be optimal but which will make them happy – then certainly not all decisions on whether to spend first or save first should be based on a marginalist cost-benefit analysis. In a word, I believe that there is no saying whether we should definitely save before spending or save after we have spent because, in the first place, it would be irrational to be perfectly rational (making a complete cost-benefit analysis) when making a decision on whether to spend first or save first.

To answer the first part of the question, I would agree with Nicholas in saying that we should first advise them to terminate all their credit cards and other unnecessary credit facilities to prevent them from incurring any further debts (other than from interests). Other than that, we can also advise them to go for proper credit management courses to assist them in making wiser decisions in the future. However, I believe that we should not, in any case (even if they go into bankruptcy), do anything beyond providing recommendations to aid in their decision making. They should bear the brunt of the debt in its entirety, and let this serve as a warning and learning experience for them to avoid any silly financial mismanagement of the same sort in the future.

23 06 2009
Choo Jia Guang/HCI/Team 10

Generally speaking, other than the same lines about how the debtors would end up in debt in the 1st place and all the advice about terminating all credit cards immediately and scrimping money usage on every single daily activity, the will to clear the debt as soon as possible lies ultimately in the debtor. No amount of advice is going to help if the debtor is genuinely willing to put in all of his/her effort in clearing the debt as soon as possible. That said, sometimes, the debtor may have tried his very best (and I mean VERY VERY BEST) and he still cannot clear the debt. Even in such a situation, I would like to say that (even though it is very cliche) death is definitely not a solution, because banks will not stop chasing the debtor and his family to clear his debt (else if every debtor dies, they’ll be the ones bankrupt instead), and (this sounds very crude but extermely true if you really think about it) his loved ones have to spend not only the money required to clear his debt, but also more money for his funeral! And that money would certainly have been more useful if it was spent to clear the debt. Also, since more hands mean less work, even if it means tolerating with all the nasty comments about getting into debt, *ahem* keeping himself alive and working with his family to clear his debt means that he does not need to bear the full brunt of the debt alone, and neither does his family.

For scenario 1, other than to terminate all credit cards and start cutting down on daily expenses to save up more money, 1 thing to note is the interest rate. Debts without interest rates are not as scary as debts with interest rates (mathematically speaking) simply because debts that do not increase can be cleared given some time so long you start paying it back, no matter how little is may seem to be. Hence, how quickly the debt multiplies would be a key factor in determining how much the debtor would need to cough up per payment in order to clear the debt. Meaning, suppose that the debtor owes $5000 and the interest rate is 2% a month, if he cannot repay back $100 a month, well, pray very very hard, and hope that miracles will happen.

For scenario 2, while I feel that a guy who still cares for his own children should help to pay part of the childcare fees even though he has already divorced since the children are certainly the innocent parties (and a dad should always continue to ensure that his children do not come to harm no matter the circumstances, divorce or what), the lady turning to a welfare organization to demand for more cash from her ex-husband to help clear her debt is an extremely irresponsible act of pushing her debt onto others, particularly her own credit card bills. Hence, the most important thing to do is to cut down spending on those Prada purses AT ALL COSTS. For a more drastic measure, she may even consider selling them to others, or putting them at online auctions, since they may be already out of fashion and she may not use them anymore. It may sound like a big loss since they were bought at high prices and sold at low prices, but ultimately, earning back a little money by selling them is better than not selling them at all, for every dollar counts when it comes to repaying debts, especially those with high interest rates. In the long term, she should (of course) cut down substantially on her fetish for branded goods (because I feel it’s ok to splurge a little every now and then), because every extra dollar overspent on these goods means that a dollar less is spent on her children’s welfare.

For scenario 3, I feel that while it is natural for females to want to be pretty (I think), the woman in question has unfortunately been too obsessed with being pretty, till the extent that it becomes an extremely irresponsible act. Firstly, her children become implicated by the harassment from debtors, which would affect their concentration in studies and fear leaving the house lest they get bullied by their debtors, and may even cause them to hate their mum for giving them so much trouble. Secondly, does constant harassment by debtors not drive this woman into more depression and makes her extremely irritated? Surely it would! If so, she would “become uglier”, which means that her continued spending on beauty treatments are of no use at all, AND, using the money to clear the debt instead would probably make her a happier person and enhance her long-term beauty. Moreover, from the fact that she has been in debt since 2002 (7 long years) and she is still spending so much on beauty treatments shows that the problem ultimately lies in her refusal to cut down spending on beauty treaments. Hence, it is obvious that she should, for her children’s sake (once again), cut down on her spending on beauty treatments. While this may seem impossible to very vain people, perhaps she could try to source around for cheaper but yet equally effective products, or go for fewer beauty treatments. It may be impossible to cut down on a habit immediately, but it can always be done gradually! (Which still makes me wonder why she didn’t think of this 7 years ago) Also, to grill in the message, it could be possible to set up many alarms to remind her to cut down on her spending, such as telling her kids and parents to keep reminding her, setting hourly reminders in her phone and computer, or even cuckoo clocks that can yell “how much did you spend today!”, and so on, for constant irritation may eventually cause her to strive hard to reduce her spending, even if it is just to keep those waffling mouths shut.

To summarize, when you fall into debt, the most important thing to do is to immediately rectify the source of debt. Is it overspending on credit cards? Beauty treatments? After that, cut back immediately on this sources of trouble, no matter how necessary they may seem, because they are completely unavoidable (people who are in debt are only a minority, which shows that it is perfectly possible not to be in debt). And while debtors can seek advice from professionals or others who have managed to clear their debts, they have to understand that they have to sustain their efforts for a long period time to clear their debts. Lastly, stay alive to do it, and do not pass the problem to others, because it does not solve the problem AT ALL.

Which brings me to the next question.

Clearly, there is more risk in spending before saving. If you do not save up before you spend, where does your capacity to spend come from? What if you overspend? What if you have an urgent need to come up with extra cash? And with all these “what ifs”, saving up is an extremely easy way to solve these problems. I do not believe that saving a just a teeny-weeny portion of your earnings will kill so easily that you have absolutely no choice but to spend it all. Moreover, with those savings, you can have more freedom to decide what to spend on with it. For instance, if you need $10000 to go on a holiday, but earn only $3000 a month, it would be impossible to for that holiday because you would never have more than $3000 in your hands. However, if you save up $839 (incidentally, a prime number, haha) a month, not only would you have enough cash for you to go on that holiday at the end of the year, you would even have $68 extra which should be enough for you to spend if you decide to take the next 3 days after coming back from your trip off to rest and recuperate at home before reporting for work again!

So, saving before spending is always better. =)

23 06 2009
Choo Jia Guang/HCI/Team 10

O dear, so sorry for the long post, I guess I got carried away… I don’t usually waffle so much…

23 06 2009
Pranav,Li Shuo,Gwee Chia Hong/NJC/F-3

“Wealth can only be accumulated by the earnings of industry and the savings of frugality” said John Tyler.
For the first case, the 27-year old man could not get rid of the card, since payment and penalty involved. He should just try hard to make the minimum payment to avoid the interest and curb him spending to minimize the cost of interest and subsequent to pay the instalment and get rid of the debt. In scenario 2 and 3, the ladies should try to find jobs firsts to have income to start to pay for the debt. They may also find help from other sources, e.g. from family or re-marriage. The lady in scenario 2 could also get help from the edu-save account to pay for the cost of education for her children. Signing up for the bankruptcy could be an option but that could reflect badly in their portfolio and their future financial endeavours.
Now most of us might wonder that what the right time to save and spend is. The frugal and the most prudent will definitely save. The shopaholics and the brand-savvy will spend. Personally I feel the time depends on the state of the economy. For those who support the save-first line I would like to point out two different cases. The first is that of China where gross domestic savings have gone up to 50% in the past ten years. This is one of the primary reasons why China has managed to stay out of the Debt-trap and hasn’t suffered any serious consequences of the recession. On the other hand Japan was once the fastest rising economies in the world .But in early 90’s they were hit by a serious recession. The government tried to stimulate spending and consumption by sending a tremendous fiscal package. The people however chose to save the money because of the pessimistic atmosphere in the market. This further shocked the Japanese economy. It should be kept in mind that savings are leakages from the circular flow of income and dampen the multiplier too.
But then should we spend first? To counter it I would simply like to point at the US economy and how unnecessary spending has landed many in the debt trap.
The answer is simple, if the economy is progressing rapidly it would be safe a considerable part of your income in savings. It may slow the growth rates but it will be the best insurance for your future as illustrated by the example of China. On the other hand recession should not be allowed to hamper the consumption patterns of the economy however savings should not be stopped either, only the allocation of income should change slightly in favour of consumption. For an ordinary man the best thing to do would be to keep up with the latest in the banking sector and save accordingly. Obviously it is important to save for the future but proper knowledge of market is required so as to avoid obstacles in the way.

24 06 2009
Tan Yi Sing/ACJC/Team 2

On the average, young people in their 20s in Singapore are just two credit cards away from being bankrupt. We are now the spend-all-you-want before you pay generation, fuelled by consumerism and the psychiatric play on human minds through advertisements and a deadly combination with the ease of obtaining credit. We dismiss the old values our conventional parents have of saving up before spend.
The marginal costs of saving after spending is far too great. Endless worries, insomnia, health problems, marital problems, breakdown of the family are all the possible costs of spending before saving. A recent study has shown that a person in debt has nearly twice the risk of getting coronary heart disease than a person without debts.
And your marginal benefits of spending before saving is? Perhaps you own that Prada bag which will become the envy of your peers. An hollow lifting of the ‘face’, a short lived joy. Why bother? We should all save before we spend. As for all those people, they should change their behaviour if they expect to get out of debt.

24 06 2009
Amalina/ngee ann poly/jae

Terminating the credit card first is a good way to control the amount of debts incurred. After temination, try to pay off debts with a higher interest rate so as to reduce the amount of loan to be paid. After doing so, it would be best if he or she consult the bank to rescehdule the payment plan for the debts. By rescheduling, he or she will have a better chance to repay according to their ability instead of being forced to be declared a bankrupt.
Another way to pay off the debt is to sell of any posessions that they have such as their car if he or she has. It wil somehow reduce the amount of debt they incur to the bank.
In my opinion, it is better to save and then spend if he or she do not have the discipline to repay debts on time. Spending and then saving is possible if they have a repayment schedule that is suitable for them. It would be much easier if a person can diferentiate between their wants and needs. It is better not to spend on small amounts on their wants using a credit card as this small amounts will increase and eventually raise the amount of debt to the bank. This is not a good sign if it exceeds the amount that he or she is able to repay.

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