Get out of Debts Now

This is about how to get out of debts now. Yes, immediately. How? Start from today and you'll be free from the crutches of your debt soon. How soon depends all upon your self discipline and the amount of debts owed.

First of all, take a piece of paper and write down how much debt you have and how much savings you have now. You may wonder why how much savings.. well some people do have savings which are earning the pathetic 0.25 to 0.5% interest from the various banks, at most 2% but their debt are charging interest of 2.6% or even more a year. That's why we need to write them down and see what we can do about it.

Next, calculate how much you spent a month to figure out how much emergency fund you need to keep. The rest will go to debt repayment to gain from the savings in interest rate charged by the debts.

Calculate your monthly expenses to figure out what's wrong:

1. Take a piece of blank paper with lines. Draw a wide left column (Desc) and a narrow right column ($) and label them.
2. Divide the sheet into sections: Food, Transport, Housing, Parents, Utilities Bills, Credit Card Bills, Insurance, Entertainment, Loans, Savings or Investments
3. Put all your Groceries, Dine Out and other food related expenses into Food category.
   Look closely at dine out and see if you can cut this part of the bill.
   
4. Put all your transportation related bills into Transport Category.
   If you have a car and your debt is just the car, consider changing to a smaller car or even sell the car, if it's worth selling.
   If you are taking lots of taxi, try cutting down and take other types of public transports.
   
5. Put your rental / housing installment, and other housing related charges under Housing Category.
6. Put the amount of money you contribute to your parents under the parents category. Add in the average mthly "bonus" or extra money that you give them either in lump sum or 1 time off.
7. Put the phone, internet, tv license, water, electricities etc under Utilities Bill.
8. Put the average monthly credit card bill that you need to pay under Credit Card Bill section. If this is the cause of your problem, pls cancel all your cards immediately. Cut them all up so that you won't use them. Start paying off these bills as soon as possible. You may want to use fund transfer to save on the interest for the time being and start paying them off using that fund transfer installments.
   
9. Put all your insurances payments in monthly average terms under this category. If this amt is > 20% of your monthly pay, you may want to revise all of them and see if you really need them or if you should convert them into something else so as not to spend too much on them.
10. Put all the money to buy presents and treats for others, watch movies, concert, buy CDs, DVDs, VCDs, wedding dinner, birthday party, house warming, KTV, etc under Entertainment.
11. Put all your loans such as study loan, car loan, housing loan, etc well just the mthly amt you spend to pay them off in the Loan section.
12. Put the balance of your monthly pay into the savings section. This amount must be positive if not it indicates that your expenditure is higher than your income. If there's a investment portion of it. See if the investment returns are higher or the debt interest is higher. If the returns are higher, perhaps it's ok to pay off the bills slowly. But please be reminded that not all the time, the investment returns will be this high.

Ok now calculate the amount of expenses incurred every month, don't add in the savings portion unless it's a regular savings plan that you can't stop servicing. Take this figure and multiply by 3 or 6 depending on the type of provision you wish to set. Let's name the result as X.

Ok.. Deduct X from all your current savings and you'll find out if you lack emergency funds (Y).

If that's the case, try cutting down your expenses as much as you possibly can such that you don't compromise your life too much like leading a friguid life, just to scrimp and save that little amount to pay off your debts.

Look at your debts and loans amount now. Ask yourself, which is the loan that you wanted to get out of most. Write the amount down and devise a scheme on how to pay them off using your monthly savings 1st that's not supposed to be part of your emergency fund. If you lack emergency fund but yet u want to pay off your debt, in that case just keep about 1 mth worth of expenses and use the rest to pay off your debts 1st. Clear as much debt as possible so that you can get out of it soon. After which, the emergency fund will follow.

If you have the habit of buying stuff and you just need to buy them to feel satisfied, try transferring the amount of money that you intend to spend in the buying habit into a separate account. Use this money to pay off your debt at the end of every month. You will still get a type of satisfaction from it as it's your freedom from debt that you are buying now. Nothing beats that. Read other chapters as I furbish this site after you cleared your most wanted to clear debts. The whole point is in the desire to be debt free and not a is ok to have some debt type of attitude that you'll need in order for things to work out your way. It's your life. Live it the way you want it to be!

Endowment Plans..

Well, when buying endowment plan, there are really plans out that that seems to be out to con our money.. Imagine, an endowment plan that gives you less than the amount you put in during maturity. The only good thing about it is that it does gives you a basic coverage in the event of death etc. At least not so bad ba.. But the whole point is.. how can the plan give you less than what you put in? This might be the case especially if the plan is bought at a high age and the plan is bought with cash back every 1-2 years. Please beware..

I had a very bad experience with AIA 'cos that's what my dad's endowment plan is. Firstly, his policy gives him a negative return and the potential returns on maturity decreases every single year. Yup, I saw it dropping every time my mum ask me to read, when I told her, she said no choice, since buy already better don't terminate. Then the policy price go up every 5 years, thanks to the 5 year level term coverage. The return, no matter how I calculate also very weird, I think it's about 1.5% or something like that. Confirm cannot even beat inflation one.

I'm not too sure about investment linked type of endowment plan but at least for those participating or non-participating endowment plan, please kindly do the following basic calculation on the returns.

Total yearly payment:

e.g. 2400 (*Please remember to add in all the riders it's normally not calculated as a set in the illustration)

Duration of plan:

e.g. 20 years

Total payment made:

e.g. 48000

Total Cashback: (if any)

e.g. 2000 * 10 (i.e. 2000 every 2 years) = $20000

Total value on maturity:

e.g. 48000

Total Profits:

e.g. $20000 (in simple calculation terms it's about 3.5% per year of interest 'cos we only divide by 10 instead of 20 as the money is not paid in 1 lump sum (Not bad ba at least better than fixed deposit.)

But this is only what our example illustrates. If your return is confirm to be what the document says it's supposed to be then it's still not too bad. At least it's a 3.5% per annual so not that pathetic. But do take note that if inflation is 3% and your return is only 3.5% it just means that your money didn't depreciates, maybe it appreciates by 0.5% per annual. So if inflation is 5%, it means that your money still depreciates by 1.5%. Do ponder over this.

Also take note and ask if the rider will increase in premiums along the years to ensure that the calculation holds in years to come. Please ensure that if your agent tells you it's level insurance they write it down at the document they pass to u and sign off as the proof.

Life Insurance

For Life Insurance, there's various types of them namely:

1. Whole Life Insurance (Such insurance comes mainly with a much high cost but it does entitles you to the "Cash Values" that it builds up. "Cash values" is the amount you will get back should you decide to terminate the policy. If you are into such cash values and wanted to make use of it to save up as well as to be protected, or you wish to be covered and protected for the rest of your life. Then, this is your option)
   
   • Non-Participating
     This is the cheapest in term of premium under this category as the sum assured is fixed, with everything is guaranteed as listed in the contract. So far, I haven't encountered any of such policies available in Singapore yet. If you have seen any, let me know as I'm interested in looking at what's available.
     
   • Participating
     This type of insurance comes with bonus attached that is given and "locked-in" every year on policy anniversary. Which means, once the bonus is given to you, it will remain as part of your "Cash Values" or Sum Assured for the life of that policy. They either gives you bonus calculated purely based on the Sum Assured or calculated based on both existing bonus and the Sum Assured. But of course with such features, comes with a slightly higher price than the non-participating one. During in economic downturn, insurers might not give you bonus but they can't take away your existing bonus. So it's pretty "safe" for in my opinion. But due to the "non-guaranteed" component of things, it's still slightly risky just that it's not as much.
     [If you prefer the insurer to take at least half of the risk (why half? 'cos about 1/2 is guaranteed and half non-guaranteed mah) on your behalf and wants to be insured for life with some upsides in terms of bonus when the insurer makes profit, this may be for you.]
     
     
   • Investment Linked
     This is the riskiest under this category. But it comes with clarity in the expenses etc. However, for such policy, I always felt that one is better off buying the Unit Trust itself along with a Term Insurance especially so for those endowment Investment Linked Policies. 'cos the charges of the underlying unit trust is slightly lower and 100% of what u invested goes into the Unit Trust 'cos the coverage will come from the Term Insurance of course. But, when it comes to whole life policy, then it's a different story.
     [If you are looking for the upsides of "higher" potential returns, savings and insurance coverage for life and don't mind risks, then this may be for you. But I still think that buying term and invest the balance is a wiser choice. Read more on buy term and invest the difference.]
     
     
2. Term Life Insurance (Such insurance is relatively cheaply available in the market but is purely protection for your dependents in the event of death and total permanent disability only, DPS [Dependants’ Protection Scheme] is an example of a cheap Term Life Insurance but it only covers from 16 to 60 years old.)
   The thing about this type is that it does not cover for life. Usually up to age 65 but who really needs coverage after age 65? Your kids / dependents should have been independent by then.
   

In this section, only purely life component of the insurance will be addressed for. The critical illness part will be addressed under "Health / Critical Illness Insurance Coverage" section in the near future.