Issue No.55


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Debt Woes

This article is reproduced with permission from
Normandy Advisory Services Sdn. Bhd (Licensed Investment Advisor)
15th Floor Menara Multi-Purpose, No 8 Jalan Munshi Abdullah, 50100 Kuala Lumpur
Tel : 03 - 469 5560 Fax : 03 - 294 5561

This article is copyright and no part of it may be reproduced in any form without the prior consent of Normandy Advisory Services

To contact Normandy

A little lesson to learn

Economic or market downturn hurts a lot more than good times feel good. It is many times more painful to see your hard-earned money being reduced by half its value than gaining a perfect 100% return from the same investment.

During periods of stress and negative income, everyone wants to do something. When things begin to turn bad, people tend to abandon carefully thought out procedures to opt for shortcuts and "quick" solutions.

Their impatience is further compounded by relative time factor - banks are rushing you to settle your bills over the next few days, your car's monthly installment is due soon, etc.

During good times when the engine of the economy was running at full steam, there was a tendency to be complacent and spend freely. Overseas vacations, credit-card spending, and owning more than two vehicles was a norm.

Between retirement and debt

Given the tight money environment, those who are highly geared or simply borrowed too much may have already withdrawn part of the money from your then retirement funds for various reasons. As the whole point of building your retirement nest egg is for your long-term security, borrowing from your retirement fund to cover short-term debts is certainly not a wise thing to do.

Don'e mortgage your future

Your retirement account is for the long-term and should be protected. Be disciplined and stick to your retirement savings until the objective is achieved. By borrowing from your retirement fund, you could be mortgaging your future.

Ask yourself this: Would you rather enjoy now at 28 with borrowed money and suffer at 80 years old? By forsaking your savings now, you are only solving your problems temporarily.

Remember that at 80, you will mostly likely be too weak to hunt for new money. For example, say you withdraw RM100,000 from your portfolio which invest solely for retirement and with a lot of luck managed to put that sum back into the account twelve months later.

Your risk is the RM100,000 is not invested during the 12-month period. The long-term growth of the money will likely be affected as it will be worth less if compounded overtime. If the money was originally earmarked for investment in the stock market and the market gained say 20% over the period, then your opportunity cost forgone will be 20%.

Consumer debt

It is even worse if you had borrowed to consume such as buying your third apartment thinking it is good investment value. Insufficient liquidity could force you to sell something that could result in a huge loss. Use money from your emergency funds for special purposes such as this and not from your retirement savings.

A more sensible way to reduce debt would be to cut spending and pay off a little each month until the debt is settled.

The sudden loss of a lucrative job could further diminish your ability to settle your bills. Under such circumstance, consult your creditor and try to work out a modified payment plan to ease your burden.

You generally stand a better chance in negotiating with your creditor if you have a good long-term relationship with the creditor and the balance of the loan is relatively small.

Never use a credit card to payoff your debts, something that many always do. Over the longer term, interest rates at between 24%~26% per annum alone will likely cost you a fortune. It will only prolong rather than solve your financial problems. Seek other ways of financing or work out a solution with your financial advisors.

Repairing bad credit

In the 1998 budget, Bank Negara tightened the rules on classification of non-performing loans. Beginning with financial year 1998, a loan which has been in arrears for three months will be classified as non-perfoming, compared with six months previously. Hence it takes only a few months to get you into debt, it will take you years to repair the damage and create a new credit