Singapore’s escalating debts – should we worry and can we prevent it?

The Monetary Authority of Singapore recently raised concerns about growing household and corporate debts in Singapore.  How does this impact me you might ask? From the various findings, you will realise that debt problems could be prevented if we were a little more financially savvy with our spending and saving habits.

In its annual Financial Stability Review, the MAS said that the corporate debt-to-GDP ratio has trended upwards since the Global Financial Crisis, rising from 52 per cent in Q2 2008 to 78 per cent in Q2 2014. The household debt-to-income ratio has also edged up from 1.9 times in 2008 to 2.3 times in 2013.

Other than property loan commitments, household debts also include credit card debt and unsecured loans.

And you might be surprised that more than 66 percent of those with debt problems have incomes above the median, as well as more than half having educational qualifications. This means that most of these people are holding white-collared jobs and living above the poverty line.

What is even more surprising is the top reason for getting buried under a pile of debt- overspending!

Credit Counselling Singapore, a non-profit service helping those in debt to overcome their difficulties, cited that nearly half of all debtors they helped cited splurging -on cars, travels and job-related changes- as the top reason for their debts.

According to another survey by job-portal Jobstreet.com, 50 percent of the executives they surveyed have zero savings. Only about five percent said they have enough to spend, with 45 percent of them claimed they are tied down with various debts originating from car, credit card or property. One quarter of them said insurance took up 25 percent of their monthly spending.

Perhaps what all these results illuminate is that most of the debt problems can be controlled and prevented if we were a little more savvy about financial planning. Here are some personal financial ratios that could provide you some idea of your financial health:

1.  Savings Ratio – monthly savings / monthly expenses

Generally, the higher your savings ratio the better. Financial planners usually recommend a minimum 25 percent total monthly savings

2.  Liquidity Ratio – Liquid assets / monthly assets

Your liquidity ratio gives you an idea of how much ’emergency’ funds you might have. The general guideline is between 3-6 months. This number let you know the number of months you can meet your monthly expenses if your income were to stop.

3.  Debt Service Ratio – annual loan payments / annual take home wages

This ratio is crucial in illuminating whether your debt becomes too much of a financial burden to you. The guideline is less or equal to 35 percent and gives you an idea of how much of your salary is used to pay off loans. If this number hits more than 50 percent, you may have to re-look your monthly expenses and cut out some spending before your debt ratio escalates.