Asked by Anonymous
Asked on 24 Oct 2018
I'm currently a final year uni undergraduate. My mum currently owes the bank more than 60k with 4.5 percent interest rate per year.She doesn't have a habit of saving and is jobless. I have about a year till I graduate.
I was planning to start investing once i have an income source but right now, Im not sure if I have the financial ability to do that anymore. So should I focus on clearing my mum debts first or are there any other possible options to explore?
Always focus on clearing your existing debts, especially at such an interest rate. The more you drag, the more it compounds, the worse the debt. Using the money to invest right now is foolhardy and would cause you even more stress.
Take for example you have $1,000 left after savings and expenses right now. You could choose to use it to invest of clear the debts. This means that you'll need 60 months or 5 years before you breakeven for just capital alone without interest payment. If investing it reaps 5% p.a as an example, the returns can barely service the yearly loan interest at all. You'll end up paying much more for the loan instead.
TL; DR: It doesn't make any financial sense to invest rn. The opportunity cost for servicing the loan is lower than investing the leftover money. Pay your loan asap.
I generally agree with Gabriel. That said, what would happen if your mom's debt isn't cleared?
Is there a house to seize? Lost business opportunities due to being a declared bankrupt etc? If not, it might make more sense for her to just declare bankrupt. You can continue supporting her of course, but you can save on the giant debt
I don't want to see Kok Koon after class bcos I need to gym so I reply here too.
We need to know the source of the problem.
If ur mum debt is due to gambling and bad habit, is likely the same problem will come back again.
My solution will solve the coming back problem if the loans are from legal source n wun get illegal harrsement.
Let ur mum declare bankrupt after withdrawing all the cash from bank or join accounts.
Close all other investment with her name and sell all valuable assets if needed. Except roof over the head.
Cpf and HDB will be protected from bankruptcy so ur mum still have a place to stay.
If u think my solution is harsh, then u just have to bite the Bullet n hate her for life.
30 Oct 2018
Do also consider speaking to the bank to restructure the debt as it sounds like your mum might be having some trouble.
I would focus on clearing off your mum's loan as soon as possible first so as to reduce the amount of interest payable. Besides, returns from your investments are not guaranteed and if you end up with a loss, you'll be in debt even more. A rule of thumb is to invest with only money that you can afford to lose
I would say do not declare bankruptcy... 4.5% loan is cheap vs the consequence of bankruptcy. Unable to fly, unable to buy things etc.
I will advise u pay off first. Only invest with money u can afford to lose.
Yes, you should clear your debts first so that you could accumulate more funds for investment. Wait for the right opportunities to invest. There is no need to rush into investment.
Unpopular opinion but it’s another perspective and I went through this -
How old is your mom, who does the house belong to and is your mom open to declaring bankrupt?
another Question you have to ask yourself is: are you totally ok with helping to pay off your mon’s Debt?
When i was 15, my dad ran into a lot of debt and had to be declared bankrupt. My mom who was working in a bank for 31 years had to give up her job because you cant be in a bank if you have an immediate family member who’s a bankrupt.
Long story short, both parents declared bankrupt.
Tbh, bankrupts in Singapore are quite protected. Yes, you cant own property, cant leave the country etc, but you can still get by.
Additionally, the official assignee will handle your mom’s debt and See if it’s possible to workout a deal, so you don’t have to worry about it.
In my case, my parents struck a deal to pay off a fraction of the debt with cpf when they reached the withdrawal age.
I would try to reduce the loan first. Investments can wait.
I know its hard to get our parents to change their financial habits, but they have to undertake austerity measures. Mum has to get a job
Restructure the loan
or maybe look into debt consolidation.
It sounds selfish but you do have to keep some savings for yourself as you will be the one taking care of your mum.
when you are making a salary but paying for 2 people, you will be very stressed and behave like you have lower IQ.
sandwich Generation problems. I feel you bro
Hi there! Hope we can help you with our feedback but again, it's your decision at the end of the day. I feel that one day, her debt will be your debt also. And you should really help to focus on clearing her debt first before investing.
Because in your case, you'll be able to get a better base to start investing.
If you earn theoretically 5-6% per year on your investments but the loan eats away at 4.5% then your nett return is only about 1%.
You should look at your monthly cashflow to see how you can channel all your efforts to clear debt first (the faster the better) to prevent compounding downwards.
I share this concept of money and interest (and how money compounds both ways here)
Even if it is 4.5% it will still compound at an astounding rate. $60k means $2700+ in interests cost alone. Since u can't pay the sum in full, there will likely be additional financing fee/charges added on? Such low rates are likely not fixed and will be floating, that means it will rise in the future. You should always pay down such debts first. There will be investment risk, and not to mention to be sure of getting investment return above 5%. You might as well pay down the debt thus guaranteeing an effective return of 4.5%+. In addition to the peace of mind.
Before looking into bankruptcy which many suggested, You should ask your mum (get a trusted friend/relative to help) to negotiate with the bank for a settlement plan. This is to stop the interest cost from snowballing (which is also what bankruptcy does - legally ceasing interest cost). Since u mentioned your mum is jobless, it seems unlikely the debt will be repayed in a meaningful way. Negotiate for a discount and a repayment plan.
If the bank or you doesnt accept the terms, bankruptcy is the next likely option. I can only touch on what to expect in bankruptcy in brief here.
Benefits of bankruptcy: Legally stops interests cost, stops all your creditors from further suing you (for debt incurred before point of bankruptcy), forced settlement program for u and your creditors.
Cons: Lifestyle restrictions. For example Have to take public transport bus/mrt (no car or taxi). Cannot eat in restaurant. Cannot buy premium mobile phone.
Cannot travel overseas without official approval. Will most likely unable to work in government and finance related job. Along with social stigma...etc
The debtor's home will be protected (If it is a HDB, and owned by singapore citizen). Furniture and most personal effects are also protected. Monies in CPF are protected too, but if the monies are withdrawn voluntarily (say after age 55), they need go towards repayment of debt.
There are cost in the bankruptcy process so bear in mind. Application/filing of documents with the court etc. Even the administration of your bankruptcy will have a % cost based on the amount involved. So it can be a costly process.
Gist of what to expect after filing application. If the total debt is under $100k, your case will be reviewed to undergo "debt repayment scheme", where a repayment program can be worked out with your creditors, thus avoiding bankruptcy status. If it fails, you will be officially declared bankrupted.
After u are declared bankrupted, u will need to file a statement of affairs with the official assignee. This will include all your assets and liabilities, creditors etc. The official assignee will work with your creditors and you to come up with a settlement program. All your assets will need to be transfered to the official assignee to be sold/make repayment to your creditors. If the debtor is unemployed, the debtor will be likely to be referred for employment and skills upgrading program.
If the scheduled repayment plan can be fulfilled by the end of 3-5years (typically), a discharge of bankruptcy can be applied.
My bro got into deep financial debts from gambling more than 10 years ago. Accumulated more than $100k +... that period also happens to be the 2008 financial crisis... my decision taken then, which I will never regret, is that I sold/liquidated my investments at huge losses in order to help him clear the debts... I was less than 30yo then... I restarted all over again after this crisis... my point is, i was still young then (i’m still only 40 now!) life is never plain sailing, this are obstacles that is bound to happen throughout our lifetime... we are family for a reason... money can always be made & earn again... we are still young... for the sake of our own investment gain/wealth, & leave our family “to die“, can we leave happily ever after still???
Ok first things first:
1) Be certain what kind of loan this is. From the looks of it, it seems like a personal loan (some banks call it cashline) given the low interest rate of 4.5%.
However, such loans usually have a fixed repayment term like 3-5 years which comes up to a monthly repayment sum of between $1,118 - 1,784 per month (assuming the loan is $60,000).
As you’ve mentioned, you are a fresh graduate and just started working. Assuming you have a gross salary of $3,500, your take home after CPF is $2,800. Technically you could help your mother with the monthly repayments, but you would have to do some serious budgeting for a rather long period.
2) Your mom is currently jobless. And she has a spending problem. It is imperative that you do not create a mentality in your mom that she can afford to be fiscally irresponsible and spend more than she can afford because her daughter will save the day. In the long run, this will ruin your relationship with her. I have a client who is in this situation and he is a very disciplined saver (to which he laments how much more he would have had if he hadn’t kept rescuing his dad).
Banks do not lend so easily nowadays and they need to sight your NOA (tax returns) or your CPF contributions. Since your mom is not working, further borrowing would be difficult. However, the concern would be borrowing from moneylenders (licensed or unlicensed). Talking about this is relevant because if this problem isn’t resolved at its root, you probably will never have enough to invest because you are dealing with this problem which never goes away.
Finally, I would actually recommend you to get yourself insured if you haven’t already done so. The ability to help your mom repay the debt is entirely based on the assumption that you are alive and able to work. Unfortunately, this assumption is untrue. An acquaintance of mine whom I suggested to get himself insured chose not to (he had just started worked 3 months into his new job). He was diagnosed with leukemia and he is just 25 years old.
Don’t take youth for granted. Based on the information you’ve shared, this is the best that I can advise. Drop me a PM if I missed anything out or if you have more information but prefer to keep it private.
I suggest focusing on getting an income source first and improving your chances of getting a job, ie honing your networking and interview skills, doing research to find a suitable job, internships to boost your resumes, learning skills, etc. Cos all the worries about investing and repaying debt are all hyopthetical and pretty much meaningless when you don't even have an income source.
Declaring Bankruptcy. If a debtor owes a debt of at least S$15,000 that cannot be repaid, then either the creditors or the debtor can file a Bankruptcy Application in the High Court. Due to the consequences of beingdeclared bankrupt, it's certainly not to be seen as the easy way out, but rather as the last resort.
4.5% rate looks like unsecured loan. If you are not the guarantor, you dont have to pay.
Some ppl just draw down many credit lines then declare bankrupt to get "free money". Credit rating will suffer but some ppl dont bother.
Like the rest suggested, I do agree that you should clear the debt first. Investing can wait, but the loan interest is compounding currently. Unless you are certain that you can get more than 4.5% of dividends/gains in your investments, I highly recommend you to clear the debt first.