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Debt–Saving at the same time and not de-risking your life

I been thinking about debt lately. More so because I may go into debt if I choose to purchase a place of dwelling on my own but also that, since I have never been in debt,  I am a bit deficient to think why people perform the way they do when they are in debt.

Not putting 100% effort into paying off debt

The majority of the folks do not build wealth the majority of the readers of this blog does. They tend to put their money in fixed deposits (which currently yields very very little).

I often reason that, the most theoretically rational action to take is to commit fully to paying down debt. The basic idea is that if its a 2.6% HDB loan, a 1.5% bank mortgage or a 24% annual credit card interest, paying off the debt fast is close to earning a 2.6%, 1.5% and 24% compounded returns.

The opportunity cost of not paying off the debt is to incur those kind of interest. This is straight forward because the alternative kind of saving or wealth building yields a very big step down.

Your mileage will vary if you are more savvy and can put your money in an endowment, a portfolio of unit trust or exchange traded funds or individual stocks. Then we have to weigh the overall returns over that X period of time, the piece of mind versus threading a debt tight rope for better returns.

In the majority of the cases, a full commitment to pay off debt when you realize that debt really gets you no where is the right thing to do. Yet I don’t see a lot of people having that vigour to commit a large part of their income to paying it down.

The main reason i felt is that, its difficult to frame your mind that you are earning a ‘return’ by paying off debt, even if your money sits idle in fixed deposit. And the debt repayment period can be a lengthy time even if you put in much effort say 5 to 7 years.

Doing a full commitment debt repayment requires discipline and willpower, which can be made easier if the debt repayment is automated, but at most time the person will likely be feeling depressed as a full commitment makes him or her missed out on much precious things. It can be rather dangerous as well if there is an emergency that comes a long, and that because of a full on commitment to pay off debt, the person doesn’t have any emergency funds saved up.

Depress and low morale gives a bigger opportunity for the person to fall off the debt repayment bandwagon. Since the  main reason folks get into a bad debt situation is because of behavioural issues, all the more the ideal plan needs to factor in their tendency to do stupid things.

It is why a lot still commit to debt repayment but also build up savings. The savings portion is somewhat like a ‘reward’ that the person can see grow as time passes, so that they don’t feel like they are missing out on building something meaningful. Some feels better when they see their stocks and bonds grow in value over time while paying off debt.

In a way, they benefit from learning 2 wealth lessons over time, that not being tied to debt is a good idea and building wealth have its reward. As long as it gets the person to stay on track, is a massive upside compared to something theoretical yet likely to fail miserably in real life.

Debt as a pay cut

If we take the mental framing further, paying debt is also means you cannot spend that amount of money . When you are not spending that amount of money, it is as if you never received that amount of money in the first place. We can have a debate of what are the ‘assets’ that we are paying for, where some of them really have economic value down the road, but cash flow wise it does look like a pay cut.

When cash flow is limited, it also puts the person’s personal or family financial statement in a more risky situation. They will have less leeway when risk events such as a medical emergency, positive education opportunities comes along.

The best opportunity to pay it down is during performance bonus time, where the person or the family have a large inflow of money. Yet most will think more of enjoyment rather than de-risking their lives.

Folks spend their whole lives slowly paying off debt, first their poly loans, then their university loans, add on the mortgage loans and hopefully not a masters education loan along the way. This is where you have to be sure the kind of job you hold, whether its a bond or an equity. If you are holding on to a government sector job, then perhaps there are some ‘defensiveness’ to this stream of human capital income, if not, then temporary being unemployed can cause some very unpleasant situations.

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Saturday 27th of December 2014

An interesting article...I am still weighing my options as to whether to pay my HDB loan as fast as possible by clearing whatever money I have in my OA at the end of the year. A calculation shows that if I were to clear my CPF at end of every year, I can finish paying in 10 years...that's 5 years shorter than my HDB loan...helps me to save quite a big amount....This versus letting my cpf money sit idlely there and earn that 2.5% interest...


Saturday 27th of December 2014

hi vintire21, Merry Christmas. I wonder if you can pay 15 years and then when you accumulate preiodically you can do a lump sum reduction, which should reduce the amortized interest.

Or perhaps choose to put your cpf in higher yielding assets.


Friday 26th of December 2014

Hi Kyith,

I look at it with a different angle. Forget about the morale part of committing to repay your debt. Let us say that you purchased a Condo for 1.2 Mil and you pay 2% interest. That's 20k interest per year. Is it higher or lower than a normal rent for the same unit? Very likely lower. So you are already making money and building wealth by avoiding the difference between the rent you would have paid and the interest you pay. The rest of the reimbursement is capital (wealth).

When I took my mortgage I wondered what could be my risks. What could happen that could hurt me badly.

1. You cannot repay the installments 2. Interests increase leading to higher installments (in an extreme case this could lead to #1) 3. The market value of my unit drops by 50%

I have a 1.4% mortgage maturing in 15 years. 1.4% is lower than inflation, thus by doing nothing I am getting richer :) However, rates will not stay that low. Looking backward at the level of Sibor and Sor you can see that it could go as high as 4% (which is not really high compared to UK/Australia/USA). My plan is to base my payments on the worst case scenario which is 4%, and set aside the difference between 4% and 1.4% This way I can avoid/mitigate risk #2.

As per Risk #1, well, the best practice is to keep an emergency fund to survive 6 months at least. If you are bleeding to death to repay early you may indeed end up not being able to repay during rainy days.

Finally Risk #3, cannot really be avoided but you can look at it differently. How? My opinion is, if you buy a unit you are sure you can live in for the next 10 years you will not be impacted (plan at least 2-3 bedrooms). You will have time to wait for opportunities to sell. Actually, if the market were to indeed drop by 50% anytime in the coming 10 years, and if you have managed to build up some cash, it is a very good opportunity to buy and build wealth ;)

My advice to lower your risks would be on the tenor. Avoid any very long tenors (beyond 20 years) or too short (lower or equal to 15 years).



Friday 26th of December 2014

Hi Regis,

Another good post. I see that you are coming from the property wealth building perspective (well not so much consider you mentioned you look at it more as a dwelling).the best part of your post is you look at debt risks as like how a project manager will look at things, which is having a risk register, listing out what are the known risks and planning mitigation, elimination and acceptance course of action for it. Who says what we learn in daily life can't apply to finance haha.

One thing i am not sure is, as i don't have a housing loan, whether a 50% drop in equity will result in a 'margin call' perhaps you can educated me on that if u know. It is seldom talked about in Singapore. If it does happen perhaps a person will need to set aside $100,000 for that scenario. as a value add, i recently work out a investment property sheet, to evaluate based on the TDSRand MSR whether you can purchase your dream home. It has a cash flow sheet where it show you based on the rental expense category what is your yield on property. I hope its fun for you to make a copy and mess with >


Thursday 25th of December 2014

A job as a bond or an equity...I like that analogy :) I think all jobs are like preference shares, with a fixed non-obligatory redemption time. But I guess you're talking about the how safe a job is with regards to bond or equity.


Friday 26th of December 2014

Hi LP,

Yes thats what i meant. Hard to model la. Can't say there is a put option that comes with it or a call option. callable preference checks a lot of boxes though.

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