Debt and Preparedness

The Sunday Times ran a story about the debt problems of young people in Singapore, noting that the debt default rates amongst those below 30 were the highest amongst the various age cohorts while those between 30-39 had the second highest rate of default. An example given in the story was of a woman who ran into trouble servicing her debt when she had to change jobs and take a 40 percent pay cut. The article then provided specific action steps endorsed by financial advisors that aim to help those who are in debt trouble.

Because of the approach taken by the article to the debt issue, one thing that was not highlighted was the fact that taking on debt these days is riskier than say 10 years ago. The reason for this is quite simple: job security is lower now and will continue to decrease in the foreseeable future. With globalisation, outsourcing and the government's current policy of liberally allowing foreign labour into Singapore in order to contain wage pressures, the average Singaporean's risk of losing his job is now significantly higher than even 5 years ago. Unfortunately for the younger adults, many of whom were brought up to have self-esteem that exceed their actual capabilities, the realisation that they can be replaced by cheaper workers of nearly equivalent skills have not made them adjust to the reality that they are likely to have poorer prospects of advancement than their parents.

While unchecked spending on consumer items is one of the causes of the increase in indebtedness, the rising cost-of-living in Singapore has also contributed to this unfortunate situation. For example, a price of a modest new (i.e. 'subsidised') 4-room HDB flat in the outskirts of Singapore has doubled in the last 7 years, while the salaries of those under 30 have definitely not increased proportionately. This significantly increases the cost of new household formation and therefore makes it more likely that the younger adults carry a heavier debt burden.

From a preparedness perspective, this situation requires us to help remind our friends and family members of the risk of diminishing job security when managing their finances, and thus be extra prudent when it comes to taking on debt. In terms of mindset adjustments, this may mean accepting the possibility that we can afford fewer material things, that we have to be more disciplined in terms of distinguishing between our material wants and our needs.

For those of us that are in a debt situation, it is important to work with a qualified financial advisor to resolve it as quickly as possible. Being prepared means moving away from being 1 pay cheque away from financial distress.