wealthmanagement-debts

Wealth Management & Debts

Debts is the one thing that can kill a person without much effort. It is like a frog swimming in a pot of simmering hot soup. Before the frog realizes his predicament, he is happily enjoying his time in a hot spring, not realizing the hot spring is going to make dinner out of him.

That is what debts can make us into. We need to be aware of what we are doing to our monies. The word that we use is "control" and if you can hold control of your monies, you hold control over your destiny.

Go to wealth experts and ask a wealth query with regards to Debts.

Let us now share with you some financial ratios that you need to use to help you in your Debts.

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(1) Debt Service Ratio & (2) Non-Mortgage Debt Service ratio:

(1) Debt Service Ratio:
This ratio measures the “Take Home” income, net of CPF contributions (minus employee CPF), used to make regular repayment of debts.

Debt Service Ratio = Total Monthly Loan Repayments
Take Home Income

A good Debt Service Ratio would be 35% below. 45% and above is consider excessive.

Financial Advice:
If a person’s debt service ratio is above the 35% guideline, your advice would be:
1. Considers re-deeming some of his/her loans
2. Watch this part carefully in the event of loss of income due to retrenchment or disability/critical illness.

(2) Non-Mortgage Debt Service Ratio:
This ratio compares the annual payments to service all debts except mortgage with a person’s take home pay.

Non-Mortgage Debt Service Ratio = Total Annual Non-Mortgage Debt Repayments
Annual Take Home Income

A good ratio is 15% or lower. That is because mortgage should take the bulk of the debts. Anything higher would mean over excessive spending in other things.

Financial Advice:
If a person’s NMDS ratio is above 15%, your advice would be:
1. Cut down on over-spending habit
2. Start on a plan to slowly eliminate each debt one by one.