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Outstanding debt can take a serious toll on even the best retirement plans that have been carefully crafted over a lifetime. Incurring debt is seemingly inevitable in the modern age, as a result of both the higher cost of living and consumerism.
With each passing year, more and more Singaporeans are sinking into the debt pool as they struggle to cover their daily expenses and make ends meet. As of December 2016, the average Singaporean household incurs an estimated $55,000 in debt, which is a 3% increase over 2015. Easily 75% of this household debt comes from unresolved mortgage loans. Some of this outstanding debt may even force retirees to expand their assets to cover their debt rather than pass it on to their beneficiaries.
However, there are several ways to effectively pay off outstanding debt to make sure you don’t jeopardize some of the best retirement plans you’ve ever devised.
1. Set a budget and track it
Creating a proper budget is a great way to analyze and plan finances. By allocating a fixed amount of money to a specific expense per month, the amount of spending can be more strictly monitored and precautionary measures can be taken quickly if expenses exceed the stipulated budget. Only through an adequate budget can individuals or households create the necessary surpluses to pay off existing debts.
Certain financial tools, like Excel spreadsheets or even Mint.com, are particularly useful for keeping track of a personal or household budget.
The main problem for a person who does not keep track of their monthly expenses is that they do not know if they end the month with a net reduction in savings, that is, if expenses exceed income and eat up savings. Knowing the amount of balance left over is crucial as a continued negative balance could lead to the creation of new debt. This type of debt is the most dangerous, as it accumulates at seemingly manageable interest rates month after month. Before the individual knows it, he/she will have made sizable interest-only payments.
Therefore, tracking tools are crucial to identify areas of weakness in monthly spending habits, but a person must take affirmative action to reverse the negative balance situation. This can be done by listing monthly expenses and using necessary cuts on certain expenses. Discipline is the key.
2. Debts staggered by interest rate
Debt escalation is another technique used to settle outstanding debts. This is a list of all current debts by interest rate, starting from the highest interest rate to the lowest interest rate. The debt with the highest interest rate costs more money, so this debt must be paid off first.
By paying off the most expensive debt first, your total debt will be reduced significantly faster. Some people who incur multiple debts per month and use escalation in their finances typically pay off the minimum payment required for each debt and use the cash balance of their payments to pay off more of the debt at the higher interest rate.
For example, let’s compare two debt instruments: one, a credit card with an outstanding balance of $4,000 at an interest rate of 24%, and another, a line of credit with an outstanding balance of $8,000 at an interest rate of 16%. Ideally, the minimum monthly payment required to pay off each debt would be made first, and the leftover finances would be channeled to pay off more of the credit card debt, even if the amount owed is less.
Escalation is especially useful for dealing with multiple debts and avoiding the accidental creation of another new debt. Escalation also instills a sense of financial discipline that’s good for dealing with unresolved debt and preventing those debts from doing too much damage to the retirement plans you’ve considered.
3. Balance Transfers
Balance transfers are another tool used to reduce interest expenses while paying off an attempt to pay off a debt for several months.
For example, given the competitive nature of the unsecured credit market, banks often offer very low interest rates for customers who transfer their existing unsecured debt from other banks. Effective interest rates could be as low as 4% per year versus a country’s normal 24% per year on credit card balances. However, the problem is that such promotional rates last only for a certain period, for example, 6 months. However, balance transfers can reduce interest costs on existing debt.
Balance transfers carry their own risks. People transferring balances must remember to pay off the debt after the transfer or seek another similar opportunity before the lower interest rate on the account to which the balance is transferred expires, otherwise they risk paying an even higher interest rate.
People who use balance transfers may also fail to address the continued accumulation of debt, thus eliminating any benefits of such a strategy. In the end, despite this cost-saving strategy, people end up with even more debt that affects savings, not to mention future retirement plans.
4. Contact Consumer Credit Counseling Services
If a person is having enormous trouble paying off their debts or even making the minimum monthly payments, they should consider hiring a consumer credit counseling service. In Singapore, this service is aptly named Credit Counseling Singapore (“CCS”) and offers solution-based credit counseling for people beset by financial debt.
CCS’s debt management services are just $130 and match people burdened with debt with a credit counselor. The credit counselor will assess the indebtedness of an individual’s situation and assist in making a financial estimate of the debts owed, identify available resources that can be used to service the debts, and even plan a monthly budget that incorporates all living expenses. Solutions will be sought to address the problem of debt and negative monthly balances to alleviate the debt burden.
If you are concerned about how your debt will affect your retirement plans, contacting CCS would be the way to go. If the retirement plan has already taken old debt into account, a proper financial restructuring could reduce interest and fee payments to be made.
Even the best retirement plans can be in jeopardy from unresolved debt. By adopting better financial habits, such as budgeting, escalating debt, and transferring balances, an unresolved debt situation can become easier to manage. If the debt problem persists, CCS can be engaged to find a solution to avoid unresolved debts. Financial advisors can also be consulted to optimize finances and manage monthly expenses, thus ensuring a better and more secure retirement in the future.