Karen Tang, CFP®: Certified Financial Planner in Singapore

5 Steps to Settling Your Debts: Millennials Find It Tough To Pay Off Loans

I was recently interviewed by Her World magazine (June 2022 issue) on an article titled “Dealing with Debt”.

The subtitle reads: “Many millennials are finding themselves stuck with unimaginable debt. Why is this happening and what can they do about it?”

Millennials are those who are between the age of 26 to 41 in 2022. Here are the interview questions and my responses:

Question 1:
Have you noticed an upward trend of millennials (those born in 1981 – 1996) amassing financial debt? If so, where are these debts from, or how did they get to be in this position? 

Indeed, there is an upward trend in personal debt levels, especially among those below age 40.

Baby boomers and generation-Xers (those born before 1980), especially in Asia, had a very different experience growing up when compared to millennials. In many cases, the former had a stricter, more disciplined upbringing which focussed on studying hard, saving money, and being responsible for their futures. They also had fewer temptations to spend on new gadgets & trinkets, and a mindset of repairing & re-using what they already owned. They had a healthy fear of taking loans unless absolutely necessary. In many cases, they also looked after the needs of their old relatives and many siblings. 

For millennials, the usual sources of bad i.e. unwise and unnecessary debt are lifestyle expenses such as consumer goods, travel, high fashion clothes, luxury accessories, credit cards spending, and a fancy car. “Buy Now, Pay Later,” or BNPL has become a way of life for them. This is also because of huge social pressure to keep up superficial appearances of success.  

On the other side, the makers of goods are only too happy for people to keep “renting” their products i.e. paying a monthly or annual fee to use it, rather than be an outright owner for the natural life of the item. They enact “planned obsolescence” as profitable strategy to make customers keep “upgrading” to their latest offering. 

Meanwhile, an example of good or wise debt is mortgage for buying the home at a reasonable price.

Some millennials also incur large debts for university education in Western countries. Whether this is a wise or unwise liability depends on the type of course they did, and how it helps them earn a greater income thereafter. 

Question 2:
Can you give an average figure for how much debt each millennial might be carrying? 

According to a Straits Times report in August 2021, the average personal loan and overdraft balances for borrowers from 21 to 29 years old shot up to $49,689 in the first quarter of 2021, about 42 per cent higher than the average of $34,941 in the first quarter of 2020.

This is big jump, and is indicative of the issue. The precise levels of debt, of course, varies widely from person to person. One thing is for sure: there must be a concerted effort to rein in these figures from spiralling out of control. Because getting every deeper into debt is much easier than reversing course to get out of it.

Question 3:
What are the pitfalls/mistakes that you see with millennials when it comes to managing their money?

  • Over spending on unnecessary things either for self validation or affirmation from others i.e. poor decision-making and spending habits.
  • Not doing proper long-term math, ideally with a financial planner, regularly. This is so that they always have good perspective on how they can make their money work hard for them. 
  • Not being properly insured, because without insurance, the best financial plans can be derailed in an instant. 
  • Not staying within a planned monthly expenses budget

Question 4:
Can you suggest the best ways to pay off these debts?

Types of debts include:

  • Investment debt (due to poor investment decisions or investing in the wrong products)
  • Credit card debt
  • Housing loans
  • Student loans 
  • Large medical bill

Paying off all types of debt requires these 4 attributes:

  1. Motivation i.e. the client must feel deeply that this is of high priority and urgency
  2. Proper planning (mathematical calculations and projections using logical assumptions and current financial data of the client)
  3. Wealth protection in place – to prevent catastrophes like health ailments from wiping out one’s savings. 
  4. Discipline – to stick to and implement the agreed plan fully over time.

The 5 steps to pay off debts include:

  1. Calculating which of the common 5 debt types – credit card, housing, student, medical, investment – must be paid off first. That mainly depends on the effective interest rate and payment term. Typically, I would suggest paying off credit card debt first. For the others, I would advise the client to see if they can refinance the debt at a lower interest rate.
  2. Make sure that all loans are be from legal and authorised entities. We must avoid “ah longs” and “loan sharks” as the government sagely reminds us. 
  3. Budgeting expenses every month and staying within that budget.
  4. Looking at new ways to increase income sustainably.
  5. Taking good care of one’s physical fitness and mental health throughout this process (Yes! This is crucial.). The reason is so that we avoid the trouble and bad choices that come with being stressed and/or unhealthy. 

Do not hesitate to seek professional help!
The earlier you do so, the greater the clarity you will gain about your debt situation and the quicker you can repay your debts.  

Approach your bank to work out a debt consolidation and repayment plan. 

Another avenue for help is Credit Counselling Singapore. Credit Counselling Singapore provides financial guidance and support on debt managing and budgeting. It can help you address your unsecured debt problem through education, counselling, and facilitating repayment, so that you can pay your debt in a more manageable manner. 

Question 5:
Is filing for bankruptcy a good idea if you’re trying to eliminate debt? And if you do file for bankruptcy, how might that affect your finances in the future? 

In Singapore, bankruptcy is NOT a good idea at all, if one can avoid it. This is because the status of being bankrupt – even if discharged – stays on your record for years. This way, people are incentivised to act responsibly when they take loans, which in turn keeps interest rates on such loans lower for everyone. 

But of course, when there is no other choice, one can take up the bankruptcy route and go through the long process of becoming discharged.

Question 6:
Can you share some expert tips for millennials to improve their financial health so that they can set themselves up for a better financial future? 

My tips include:

  • Be fully protected, i.e. insured, especially against health calamities, without over-paying for it
  • Create a monthly budget, and try to stay within it
  • Track your cash outflows – what are your top 5 expenses every month?
  • Use only cash wherever possible
  • Make it a habit to think before spending money – proportional to the amount. Ask yourself “Is this a necessary or smart choice?”
  • Designate only one credit card for all your spending. Not only does it make tracking easier, you would be more conscious of the credit limit you have used up. 
  • Do not carry forward credit card balances. The interest is exorbitant!
  • Pay off your debts, especially the high-interest ones
  • Invest in things that will appreciate in value
  • Work with a CFP® to ensure you have a comprehensive financial plan

In conclusion: To achieve financial freedom, one of the vital things to aim for is zero debt obligations or minimal reliance on debt. Take control of your finances today! 

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