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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.
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too much may have already withdrawn part of the money from your then retirement funds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.
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%.
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.
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
history.
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