How can I climb out of debt?

ASK CMMB

30.MAR.07

Question? I have a well-paying job, but I’ve been trying to get out of debt for years.

It seems like a deep hole. How can I climb out?

Answer: There is no magical formula for freeing yourself of a heavy debt load. It just requires plain old-fashioned discipline on the path of the individual. One should always aim to live within your means. However, there are some other ways to negotiate your loans in order to get some relief. Make sure and have the ability to make lump sum payments to your loan before the maturity. This would help you to reduce your debt load at a faster rate. It would also help to reduce your future monthly payments of principal and interest. Some facilities put heavy penalties on early repayment so make sure and negotiate this way so you would have the freedom to retire your debt early.{{more}}

Secondly, make sure and shop around for lower rates from two or more banks in order to get a market read. As rates have fallen drastically in the market it may be possible to renegotiate the interest rate on your loans and hence reduce the interest factor of your monthly installment. Thirdly try and spread your loan over a long tenor in order to reduce the size of the monthly payments. This would ease the strain on your monthly cash flow. While the interest you pay over the term would be higher this may be necessary to allow you to meet other monthly commitments.

Question? I once heard someone advise that to build a solid financial foundation you should pay yourself. What does that mean?

Answer: It depends on the meaning of the expression pay yourself as there are varying interpretations to this rule of thumb. If you mean that you take on monthly commitments ie debt payments and household expenditure only to the extent that you can set aside a fixed amount per month to savings then this is sound. However, if the interpretation is that as a business person you put funds aside for dividends before taking into consideration your creditors and employees then this is not advisable. Employees and creditors are important stakeholders in a business and their needs should be considered first before those of the shareholders. As a principle this would work to the benefit of the business in keeping good working relations with these key stakeholders.

Question? I’m a young person in my twenties and I would like to start building wealth to take care of my family. I am also hearing about loan sales from a number of financial institutions. Should I borrow and invest in the stock market?

Answer: First of all, you need to determine whether you would qualify for the loans you are hearing about. Approach the institution offering the loan and find out the details. At most banks the qualifying criteria usually include a debt service ratio below some specified level and a good credit history. This would be especially so since a lot of the loan sales are being offered on an unsecured basis. If you can obtain the loan then investing in the stock market may be suitable for you. However, it is important to note that while you have to pay a monthly installment towards the loan you would not be receiving monthly cash flows from your stock market investment. You would therefore have to fund this out of your salary. So it is important to look at your existing fixed monthly expenses and commitments and then add on what the loan installment would be to see if you could comfortably afford it. You do not want to place an undue strain on your monthly cash flow and jeopardize your necessities. You may thus want to borrow the amount that would allow you to pay for expenses and the loan and still have some left for emergencies and discretionary expenditure. Also, make sure that the loan term is longer than four to five years. While the amount of interest that you pay would increase it gives you time to let the market work for you. But more importantly there is short-term volatility in the stock market and you do not want to be forced to liquidate to pay off your loan when the market is down. After this has been worked out talk to a broker and get some advice on the shares that are likely to perform well.

Disclaimer: All information contained in this article has been obtained from sources that CMMB believes to be accurate and reliable. All opinions and estimates constitute the Author’s judgment as of the date of the article; however neither its accuracy and completeness nor the opinions based thereon are guaranteed. As such, no warranty, express or implied, as to the accuracy, timeliness or completeness of this article is given or made by CMMB in any form whatsoever.

CMMB and/or it employees or directors may, where applicable, make markets and effect transactions, or have positions in securities or companies mentioned herein. Neither the information nor any opinion expressed shall be construed to be, or constitute an offer or a solicitation to buy or sell.