Why 1 in 3 Singapore investors are in debt

So there are two kinds of people in this world, right? The people who know about money and financial products and the people who don't. Nothing wrong with being in either category, of course. We know we have fans from both kinds of people. Heh.

That being said, you would expect investors to be in the former category. After all, they wouldn't invest their hard-earned money into something they didn't know anything about. And of course, you'd think that people who get into debt are those in the latter category. After all, it's likely that people who are in debt are not familiar about money matters and financial products.

So why are 1 in 3 investors in Singapore in debt?

Wait, where did you get this number from?

Earlier this month, the latest Manulife Investor Sentiment Index survey revealed that 33 per cent of the Singapore investors surveyed have some kind of debt. This means that 1 in 3 investors either have personal loans, education loans, credit card debts and so on. For obvious reasons, home loans are not considered debt in this case, otherwise the number would naturally be much higher.

This number is significant because it's one of the highest in the region, with only investors in Malaysia and the Philippines having a higher proportion. What's worse, about 46 per cent of Singapore investors in debt owe $10,000 or more, while 44 per cent expect to take more than one and a half years to clear their debt. That means about 1 in 6 investors surveyed have significant debts.

And that's exactly where the problem is. For the purpose of their survey, Manulife defines an investor as aged 25 and above, and who are the primary decision maker of financial matters in the household and currently have investment products. Simply put, that means these are people who have incurred debt while also hoping to grow their money.

So what's wrong with being in debt while you're investing?

Let me explain using an illustration. You're trying to fill a bucket with water from a tap. Unfortunately, that bucket has a hole. If the bucket is losing water faster than you're filling it, you will never stop trying to fill the bucket with water. What's worse, you're wasting water in the process, which in the grand scheme of things, is a finite resource.

In our case, water represents money, the hole represents your debt, and the tap is your investments. If your debt is bigger than your investments, you'll not only never grow your money, but you're wasting money in the process.

The purpose of investing is to grow your money, not lose it.

So why is this happening?

I can think of three scenarios why investors with debt don't just pay off their debts with their investments.

1. Investors with debt who are trying to maintain a certain kind of lifestyle.

This is the silliest situation to find yourself in. In fairness, not everyone starts in this position. For example, people who have been enjoying a certain cost of living would presumably have set aside money for long-term investing. Suddenly, they are laid off, or encounter some other situation that results in their source of income being significantly affected. What happens then?

Instead of reducing their lifestyle spending and liquidating some of their investment assets, they assume it is a temporary setback and continue to live with no change in their lifestyle. Eventually though, they end up incurring debt in order to maintain a lifestyle they can no longer afford. All this while, they continue to set aside money for investments, still hoping it'll grow their money.

The biggest reason cited for debt was basic expenses like meals and transportation, followed by peripheral expenses such as travel and shopping. Er, ok. The solution is often painfully obvious to everyone around them but themselves - they need to spend within their means.

2. Investors with debt don't realise they should pay off their debts first before investing.

Simply put, you shouldn't invest with what you don't have. Firstly, few investments can truly claim to give you high returns. If it was so easy to make money, we'd all be rich. Secondly, the amount of returns you can expect from an investment is usually lower than the interest charged on your outstanding debt. If not, everyone would be borrowing money to make more money.

Thirdly, investment returns are seldom guaranteed. You may make money, you may lose money. But expecting you to pay the interest on a debt? That's always guaranteed, regardless of whether it involves red paint and pigs' heads or not.

So in short, if you're investing to make money, but you're in debt, you definitely should liquidate your investments and pay off your debts first. Even if liquidating your investments means realising a loss now, it's still preferable to incurring a bigger loss down the road.

3. Investors with debt can't liquidate their investments quickly

Some investments just can't be sold at a moment's notice. This could happen for a variety of reasons. For example, with high-risk investments like Contract for Difference (CFD) products, you're actually investing with borrowed money. If the market is volatile and the value of your investments drop, you may be required to pay the difference, known as a margin call.

This is especially crucial for investors who think these kind of short-term investments are the way to go in the current financial market situation, and end up overleveraging themselves.

Again, the danger here is investing with money they don't actually have.

So what's the real reason why investors in Singapore are still in debt?

The common thread through these three scenarios is the false belief that you can invest with money you don't have. The average Singaporean who wishes to invest must first learn that when he/she sets aside money for investments, it's should be for the long-term.

Therefore, they should not be investing with money they need to pay for their basic necessities like paying their mortgage, their daily needs, insurance premiums and so on. Furthermore, if they want to invest, it needs to be set aside from money that they would otherwise be spending, not money that they should be setting aside to save.

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