Why are you not financially independent? : Part 2

This is part 2 of a series. Read the earlier parts of the series here first. 1

So.... Since it sounds so easy to be financially independent, why aren't most of the people, especially in affluent Singapore, financially independent?

There's quite a large possibilities of reason actually. Some, such as financial education, government mindset, personal mindset, money management, etc. And from these, effects happen. An example would be credit lines and loans.

Now, I'm not saying that credit lines and loans are bad. In fact, nearly all businesses in the world would not be able to function if they are not allowed to take on debt(such as bonds, credit terms, etc). What I'm saying is, all these possibilities have come together in a way, that people do not properly perceive the dangers of credit lines and loans.

More and more people around the world become more reliant on credit cards. Such that, at the end of the month, they are laden with a huge credit bill. If you are prudent, you would actually have the cash to pay it off. In that case, credit cards are good, cause you have deferred payment for something you have bought earlier. But what if you don't? Then the power of compounding interest comes in to suck you dry.

Another example is study loans. These loans are made very freely available to people who want to take on tertiary education, usually with very little restrictions on guarantors. One advantage of such a loan is that sometimes there exists a deferred loan repayment scheme. This means, you only start accruing interest and start repayment after you graduate. In fact, if there is such a scheme available in you instituition, you should take it. Rather than pay cash, allow your cash to be invested, earning you some free money before you have to pay up your loan.

Lastly, car loans. Thats pretty much the most dangerous thing ever. In most countries, cars are actually affordable. But in Singapore, you pay $60,000 to $120,000 for a car thats not even a luxury car.(Sometimes, not even a 2000cc car) Knowing people, most take up loans for them. With the relaxation of the loan regulations, some people even take up 90% or 100% loans! Paying $0 to drive away a car. No wonder even a person earning less than $3000 per month are driving cars!

Cars are actually high depreciation objects. In fact, if you do break down the numbers to an annual basis, most cars will cost you an average of $10,000 per annum. Lets face it. Singapore has one of the best publics transport system in the world.(Yeah, buses are slow sometimes, trains are infrequent, people like jumping off rail platforms. But it works!) You don't need a car. A car is just to feed the ego.

Lets do a small little case study. Lets say, we have Tiffany. Tiffany is our dear university graduate that has just started work.

In Singapore, university fees are about $6000 per annum. And most people take on a 4 year direct honours course. On top of that, the universities also offer a form of annual allowance. I suspect, possibly to allow undergraduates to study without too much financial worries. The allowance is about $3600 per annum. Not a lot, but enough to get by a month.

So, when Tiffany graduates, she has approximately $38,400 worth of debt. If she did an overseas exchange, it will be more. If she took a computer loan, it will be more. If she lived like a normal university student, it will be more. *gasp!* a five figure loan, even before you have worked a day in you life!

Now, the prevailing bank prime rate is about 5% per annum and most education loan charges prime plus 1.5. For comparison sake, a government housing loan is approximately 2.6%(at 0.1% above CPF OA rate), a car loan is approximately 6.5 to 7.5% and a credit line/card is about 16-24% per annum!

Of course, the banks are all very generous people. They allow a person to to stretch out an education loan for up to 20 years. So that means, at 45 years old, you would still be paying for your education at 25 years old. So of course banks are generous! You'll be a customer for life! Literally.

Lets say you've got no money, so you drag out the payments. For a 20 year repayment period, you gotta pay $210.38 per month. For a grand total of $49,920. Thats 30% more than your original loan!

Now, maybe you're more prudent. More conservative with you money and you wanna get rid of the loan as soon as you can. Most undergraduates earn about $2500 to 3500 per month. Our dear Tiffany, decides to fork out a hefty $800 per month. It still takes you a good 4 years and 9 months to pay off the loan. Even then, you paid $45,901, or 19% more than your loan amount.

I'm not even going to talk about car loans, housing loans, credit debt, etc.. But thats how the banks suck away the money and a person's dreams of early retirement.

But wait. There is hope! All is not lost yet. However, the first thing you have got to do, is to know where are you standing now, financially.

The easiest way is to measure your networth. Draw up a list of your assets and liabilities. Assets, are things that can potentially earn you money. Thing such as cash, investments, or anything that you own.(priced at an amount that people will buy from you now.) Liabilities, are things that cost you money. Such as, credit debt, loans, accounts payable, monthly bills, etc.

Take all your assets, minus your liabilities, thats your current worth. If you're in the negative red, don't worry, you're not alone. If you're in the positive black, congratulations! Now you've gotta work on growing that networth.

Action: Measure your personal networth.

Recommended reading list:
Rich Dad, Poor Dad - Robert Kiyosaki

In the next of the series, we will look at how does a person's culture and mindset keep them from becoming financially independent.

Stay Tuned!