With easy access to credit, it's tempting to maintain an expensive lifestyle. These signs suggest that you're living beyond your means in Singapore.
The dark side to owning credit cards in Singapore is how easy it becomes to spend. With two to four times income available at a moment’s notice, some Singaporeans are tempted to accumulate years of debt in the span of a few days.
Such habits need to be spotted and eliminated quickly. Once the first late payment letters arrive, you may already be in way over your head. Watch for these signs that you’re living beyond your means:
1. Your Debt Servicing Ratio is 50% or More (And You Don’t Have a Mortgage Yet)
Your Debt Servicing Ratio (DSR) is a percentage, which reflects how much of your monthly income goes into loan repayments. For example, if you earn S$5,000 a month, but you have to repay S$2,500 a month due to debts, your DSR is 50 per cent.
Your DSR should not reach 50 per cent if you have not taken a mortgage (home loan) yet. If it does, it is a sign of potential debt problems. You need to cut back on your use of credit, and focus on paying down your loans.
Also note that you will be unable to take out a loan for a house if the mortgage would drive your DSR to 60 per cent or above. This is true for both HDB Concessionary Loans and private bank loans.
2. You Have no Savings or Investments
If you spend your entire pay cheque every month, you are living dangerously. This leaves you without savings to tap in an emergency, and you are not building up your funds for retirement.
At the very least, you should have 20 per cent of your pay every month go into savings. If you don’t, you are overspending.
3. You Have Credit Card Debt
The correct way to use a credit card is as a mode of payment. That is, you should repay the entire amount you owe every month, regardless of what the minimum sum actually is.
Credit cards have a high interest rate of 24 per cent per annum. Paying interest significantly outweighs the benefits of reward points, cashback, or air miles.
If you find that you constantly leave a balance on your credit card, you are overspending. You should always have enough to fully repay what you owe. A simple solution is to have the bank lower your credit limit, if you (or a supplementary card holder) have a spending issue. Set the credit ceiling to match your monthly income, or even lower.
Take a look at our debt management articles for tips on clearing your unsecured debts.
4. You Have Less Than S$10,000 in Savings By the Time You’re 30
If you save just S$200 a month from the age of 25, at zero interest, you would still have at least S$12,000 by the time you’re 30. If you have it in a simple investment, such as an endowment policy or the Straits Times Index fund, you would have around S$15,000.
This can be a helpful contribution to your emergency fund, or make up some of the down payment on your house. It is also common to most people who have a simple savings plan.
If you are 30 and have not reached this amount, you may have to reassess your spending habits (an exception is if you had to spend your savings on some kind of emergency, such as a medical crisis).
Speak to a financial advisor or wealth manager on how to better plan your finances.
5. Your Credit or Debit Card Often Gets Declined Due to Lack of Funds
If you live in terror of your card being declined, we hope it’s due to administrative errors (change your bank)!
If it’s often being declined because you have nothing in the bank (debit card), or hit the credit ceiling (credit card), you have a spending problem.
A typical credit card has a ceiling of two to four times your monthly income. For most people, it is abnormal to ever hit this limit - you should not be spending your entire income, let alone two to four times that amount.
The only time you should have loans that huge is when you have a mortgage, car loan, education loan, etc. And they should certainly not be on a credit card, due to the high interest rates.
If your debit card is often declined, that means your bank account is emptied out. If this happens, you should at least have set aside 20 per cent savings and repaid all your bills. If it occurs before you can do those things, you are overspending.
If you need a large amount of cash for an emergency, get a personal loan instead. Not only are interest rates far lower; you get to pay in monthly instalments, making it easy to budget repayments.
You can get the lowest interest rates in Singapore through exclusive low rates from SingSaver.com.sg. HSBC Personal Loan is currently offering 4.5% p.a. (EIR 8.5%) to new applicants.
6. Utilities Getting Cut Off is a Frequent Issue
Is your phone line often disconnected due to late payment? Do you get warnings about conservancy charges? If you have trouble covering these basics, but still buy S$7 lattes and cab everywhere, it’s a clear sign your financial priorities are wrong.
Always pay your bills before you start spending on other things.
You need to distinguish between basic necessities, and your discretionary income (the amount you can spend on anything you like). Pay for necessities first. Not doing so can seriously interfere with your job and credit rating, and may cause serious financial troubles further down the road.
7. Your Friends Earn As Much As You Do, But Live More Comfortably
Sometimes there are other explanations for this. Your friends may have financial obligations you do not, and thus live a less luxurious lifestyle. But if they are in the same situation as you, and earn just as much, then something is wrong if they seem deprived by comparison.
Is your discretionary income several times larger than theirs? Do you manage to travel when they can’t seem to afford air tickets, or eat at fancier restaurants more often? Be wary: it could be due to their saving and investing, whereas you are blowing your excess cash on hobbies.
Every group has that one spendthrift friend who ends up in debt five or six years down the road - make sure that’s not you.