In this day and age, people pay with credit for just about anything – from big-ticket items like homes and its furnishings to daily purchases like groceries. You could have incurred a certain amount of debt from such items yourself, and may be wondering if the level of debt you hold is acceptable or not.
The example below illustrates the effects of spiralling debt, and Adam’s story could help you find out if you’re in financial trouble.
Adam is a 30-year-old salesman who recently bought an HDB flat with a bank loan. Before committing to the home loan, he was financially stable, but he used most of his savings for the down payment.
After buying his flat, he used his credit cards to pay for his renovation and home furnishings. Adam increasingly found that he was having a hard time keeping up with his growing debt.
To ensure he has enough cash flow for daily expenses, he could only afford to make the minimum payments on his cards, as he still needed the credit to finance his daily expenses. As a result, his outstanding loan snowballed to more than 5 times his monthly salary.
Adam borrowed again to pay off some of his debt. While this lump sum gave him temporary relief, he faced a new set of loans from a new creditor. Eventually, Adam’s debt was giving him so much stress it affected his career.
He finally sought help from his friends and family, who advised him to get professional help. The organisation helped him create a realistic budget that took his daily expenses into account while also allowing him to pay off more than his minimum amount every month. It has since been a year of discipline and determination, and Adam is well on his way to clearing his debts.
If you related to some or most of Adam’s story, you could be experiencing some problems managing your debt. Identifying specific signs of a debt problem is the first step in reclaiming control of your financial life.
Even if your debt didn’t start out as a big amount, interest can compound quickly and cause your outstanding amount to become unmanageable. This was the biggest factor that resulted in Adam’s debt to spiral out of control. If Adam had paid off as much of the debt as he could instead, he may have had to finance a much smaller debt.
Financially healthy individuals often allocate a certain amount each month to their savings to build their emergency funds or plan for retirement. If you find that the size of your savings is depleting because all your funds are going towards expenses and settling your debt, you may be heading down a path of financial difficulties.
Before getting into debt, Adam had a healthy amount of savings. Unfortunately, a big purchase or unforeseen circumstance caused those savings to deplete very quickly. Having a strict and realistic budget that you apply to your spending habits can prevent you from inadvertently sliding into a situation like his.
Borrowing from another source to pay existing debts could be digging you into a deeper hole. Adam’s decision to borrow a lump sum may have seemed like a good idea at first, but his relief was short-lived. Incurring another loan didn’t help him manage his debt over the long-term and it only added to the amount he would have to repay. It can even result in debt that’s harder to keep track of as he would need to repay multiple parties.
This is one of the surest signs of a debt problem, as debt collectors are only sent by collection agencies after a significant amount of missed payments and written notifications.
If you are still unable to find the funds required to furnish your loans, your property may be repossessed in lieu of cash payments. In serious cases, this may result in losing your assets like your home or vehicle.
If you have already experienced this, you should consider contacting a professional for assistance, such as Credit Counselling Singapore.
If you find yourself in Adam’s position (or one close to it), it’s never too late to get help. The earlier you recognise your debt problem and seek assistance, the higher your chances of getting your finances back in order.