|Money Week Episode 21 @ 1 Sep 2012|
One morning, I think it's about 3 weeks ago, while we are having our usual breakfast session, Ms. Michelle Ee, our Insurance Director, asked me to address the following financial situation w.r.t. debt management. And that's how I got "famous".
Nevertheless, I enjoy the shooting and got to know new friends and appreciate the importance of Business Mandarin. I must take this opportunity to thank Mr. Liu Zhipeng and his team for being so patient with me during the shoot. Also Mr. Eg Yi Fan, a brilliant gentleman and an amazing listener who is able to understand my explanation on the tedious loan calculation during our tele-conversation.
So what was the question?
Audience : Let's address him as X
Subject: Tuition Fee Loan
"I just graduated from a local university with a interest-free tuition fee loan when I was a full-time student. However, my loan which is about S$50,000 will be interest-bearing from 1st August 2012.
The interest rate will be at prime lending rate (board rate) at 4.75% per annum.
I can choose to pay a minimum amount of S$100 monthly for a maximum of 5 years.
I can also choose to defer payment till August 2014, which means I can start to pay S$100 monthly from 1st August 2014, but interest will still be incurred during the 2 years when I didn't make any monthly payment. (But of course I cannot choose to pay minimum of S$100 as this amount is not sufficient to fully repay everything within 5 years) Currently, I have a total liquid assets of S$100,000 including:
S$15,000 fixed deposit (matured in July 2013)
S$50,000 of stocks (most of them are blue chips, high-yield such as Singtel, Starhub, SPH, Singpost and REITS which are now all above at least 10% above the price I had bought) I would like to ask if I should pay all the S$50,000 before the interest commence, or should I do otherwise? Thanks!"
So about 20 minutes later, I got it written on my ipad and send her the draft.
As spoken, if X want to be debt free, then I would suggest he fully paid off his loan.
This is one of the options.
Next, he could paid off his loan over the next five years, if he want to feel "cash-asset".
So with this available cash at hand, he could invest his money to get a better return, subject to his risk appetite. Five years is a reasonable horizon to get his money invested.
However, first thing first.
Debt is not an issue, it is managing the debt that might post a potential issue.
So first question is to find out whether he can afford to pay the $100 monthly repayment.
If he can, then the next question is how comfortable is he to pay the extra on his monthly repayment? Meaning to say, have a higher monthly repayment, say $200 per month. This will shorten the loan tenure.
If he preferred to be debt free, my answer is obvious as mentioned earlier.
Second question is the debt is manageable, then it's a question of what is his attitude towards investment risk?
Cash in one hand, loan on the other. Then he need to ascertain his target rate of return for his money to work for him. In this case, the loan rate is 4.75%, so if he is targeting to get that extra 20%, then his targeted rate of return shall be at least 5.7%. (4.75% x 120%)
He can't get these type of returns without taking any risk!
Michelle, I must say you have set me thinking. Thank you.
Sent from my iPad, Chew Hock Beng @ 93897195 @ LinkedIn @ Google+ @ Twitter"
After that I got my helpful colleguae, Ms. Angela Dou, to translate it to Mandarin.
"如果 X 不想有债务在身，我建议他一次性付清他的贷款，这是其中一个选择。
如果他既有现金资产，又有贷款，在进行投资时，他需要确定一个目标投资回报率。在这个案例中，贷款利率是 5.00% (4.75%)，如果他想获得格外的20%的回报，那么他的目标投资回报率至少要在 6.00% (5.7%) 以上。要想获得投资回报，不要承担风险是不可能的。"