To be or not to be (in debt): that is the question

Different people see debt differently
The issue of debt raises many points of views among different people.

Debt is an issue all of us have to deal with in one way or another because there are some things in life that we are unable to finance it fully in cash at the point of purchase. Your home for instance. As long as you have aspirations to own your own little abode, in most cases, you would have to finance it with debt besides using cash or your Central Provident Fund (CPF) monies to pay the downpayment of 10% or 20%. If you have aspirations to own your own car, chances are, you would take on some form of car loan to finance it. Some of you may want to splurge during the Christmas season on holidays or spa treatments but your bonus will only come after December in January and you make use of credit cards or personal credit lines to finance your consumption.

Debt makes you a slave
Whether you like it or not, if you want to have your own home, you will have to take a housing loan unless someone gave you your home for free or you are paid so much income that you can afford to pay for your home in full after working for some time.

Taking a loan to buy your home will be the single largest purchase you will make in your life. It changes your financial situation totally because of the quantum of the loan (typically in the range of $100,000 to $1 million or more) and the loan tenure (typically in the range of 15-30 years).

Getting your home through taking up a mortgage makes you a slave to your home like it or not. It also makes you a slave of your job or business that finances the loan taken up to pay for your home.

How are you a slave?
In ancient times, a slave was someone indebted to his master or owner and had to do his master's bidding until he was granted his freedom or he bought himself out of his status. In modern times, slavery is outlawed in most civilised countries but it has been replaced by the current model of the home mortgage. In a mortgage, you are obliged (indebted) to pay the bank your monthly instalments which covers interest payments as well as repayments of your principal without fail in order to discharge your debt to the bank. In return, the bank lends you money to buy your home (normally 80% or less if you manage to save up or use more cash/CPF to pay for your home) and to enjoy its use. You are the owner of your home SO LONG AS YOU PAY YOUR MONTHLY MORTGAGE INSTALMENTS. Once you miss even a single payment, the terms of most mortgage loan allows the bank to seize ownership of your home and realise it to discharge your debt to them. Home mortgages are secured by the value of your home. Therefore, the bank doesn't just lend you money based solely on your income or ability to service your loan. The bank will require you to pledge your home to the bank in the event of your default so that as a last resort, the bank has some collateral it can use to discharge your debt to them.

So you cannot afford to lose your job as if you are unable to make your mortgage payments, you risk losing your home. In the worst-case scenario, if you are in a negative equity situation, even after the bank takes back the home and sells it, you may end up still owing the bank money!


How I felt when I was a slave
During the years when I was paying off my home mortgage, I felt some pressure every time I examined my statement of networth as I was basically in a net liability position during the initial years of taking the loan. Whenever I encountered a work situation that was not going well, the work stress that I felt was exacerbated knowing that I cannot afford to just quit and would have to be careful to ensure my job security and financial security.

It didn't help that during 2001-2002, I witnessed several colleagues working in different departments in the organisation being asked to leave as part of a cost-cutting exercise to increase profit margins. That means the company asked people to leave even when it was making money because the owners wanted even more profits to help improve the return on equity figure.

These and my own conservative nature made me very aggressive in paying off my loan early and I disciplined myself to plough back my bonuses, windfalls and savings in cash and CPF to pay off my mortgage. Some of the sacrifices I made included taking public transport for 12 years of my working life. It also included not taking many long holidays to far away destinations. Opting for closer and short trips and cruises. I lived and continue to live a simple life. My working wardrobe hardly changes and I try to cook more meals at home for health and cost reasons.

I have to admit that I didn't do all these by myself. I am blessed with parents that helped by giving me an interest-free loan which I have paid back to them after these 12 years. Their help was invaluable as it allowed me to take much less than the maximum 80% of valuation for the mortgage. This has made me also want to give the same assistance to my daughter who will be born next year. :-)

Going forward debt-free
Now that I have managed to buy my own freedom from debt, my savings now are all channeled towards my retirement nest egg as well as providing for my family. This frees me to enjoy life that much more without the yoke of mortgage loan hanging around my neck. It also makes me less worried about my job, to do my best professionally but no worrying too much about being a slave to my boss and the big bosses. I do my job to the best of my ability but I am not a slave that has to be at the beck and call of my superiors.

I value my job but am not a slave to it.
I enjoy my home but am not a slave to it.
I live a simple but fulfilling life and also want to leave a positive financial legacy for my family by providing for my retirement without needing them to support me financially in my old age.

How will you manage your own debt? Only you can answer that question!

Be well and prosper.