7 tips to make your finances more resilient
The Straits Times, 14 Aug 2022, Sun 5:00 AM
By Lorna Tan
With inflation hitting record highs, coupled with ballooning expenses and sluggish income growth, consumers are caught in a bind, but all is not lost.
We can focus on the things that are within our control to better manage our finances now that inflation has reared its ugly head.
DBS' latest report - "Are you losing the race against inflation?" - highlighted that the lowest-income group and baby boomers (ages 58 to 76) are among the most vulnerable to inflation. As such, these consumers could have less bandwidth to stomach higher inflation in the future.
On a positive note, millennial customers (ages 26 to 41) andboomers are in a better financial position to beat inflation because their investments grew faster than expenses over the past year.
But the report noted that Gen Xers (42 to 57), who are near retirement age but saw investment growth lagging expenses, could invest more to boost financial resilience and safeguard their nest egg.
It also indicated that the incomes of nearly half a million DBS customers lagged the surging inflation rate, with some customers even experiencing a decline in real income. This is exacerbated by expenses, which have grown two times faster than income over the past year.
The research analysed publicly available data as well as aggregated and anonymised data from 1.2 million DBS retail customers.
So what can consumers do? Here are seven tips to guard against inflation and make your finances more resilient.
1. Review your expenses regularly
Make it a habit to review your expenses on a monthly or quarterly basis to make necessary adjustments.
Use digital financial advisory tools such as the DBS NAV Planner to help you keep track of your outgoings and set up a budget that includes saving and spending targets.
In today's environment of rising prices, we are facing the reality of tightening our belts. The report has indicated that transportation, food, and housing and utilities are the three key components hitting our wallets.
So, it really helps to understand our individual spending habits. By doing so, we know which areas we can work on to reduce discretionary spend and enhance our financial situation to manage the uncertainties ahead.
With interest rates heading north, people servicing home loans may consider refinancing or repricing to a more suitable mortgage if they are out of the lock-in period. Do a cost-benefit analysis first and consult a home loans specialist.
Home loan options include fixed-rate, floating-rate or a combination of both. New home buyers should refrain from over-leveraging and maintain adequate funds to tide them over for at least a year.
Home owners experiencing tight cash flow during this period could consider paying off housing loans through the CPF Ordinary Account (OA) and maintain liquidity.
You can always do a voluntary housing refund to your CPF OA in the future when your situation improves.
2. Shop wisely
Some suggestions: Buy house brand products at supermarkets, bulk buy non-perishables if there is significant discount, consider buying second-hand items, and look out for promotions.
Use credit/debit cards that are more suited to your lifestyle to earn cashback, points and miles.
Do ensure control over your spending as credit card debts can snowball quickly if they are not well managed. Pay your bills in full and on time.
3. Inflation-proof your savings
While emergency cash should be kept liquid, keeping all your savings in a simple account will not preserve your purchasing power, especially in a high inflationary environment.
Some possible instruments to consider for the more liquid andlower-risk portion of a portfolio include higher interest-yielding savings accounts like the DBS Multiplier Account, Singapore Savings Bonds, money market funds or endowment insurance plans.
Beyond savings, you would need to start investing your money for a better chance at beating inflation and achieving your life goals.
4. Start investing and adopt a long-term horizon
As a rule of thumb, at least 50 per cent of your net worth (assets minus liabilities) should be invested.
A regular savings plan works on a dollar-cost averaging approach and helps customers accumulate their investment steadily with no need to time the market.
Consider a robo-adviser such as DBS' digiPortfolio, where a team of portfolio managers carefully select exchange-traded funds to create quality portfolios and monitor the market regularly.
Research reliable sources for investment ideas. For example, DBS Group Research's Singapore Equity Picks generated a time-weighted rate of return of 14.51 per cent in 2021 and has consistently outperformed the Straits Times Index since its inception in July 2016.
5. Stress-test your financial plan
Most financial plans assume an inflation rate of 2 to 3 per cent when projecting future income flows to determine retirement adequacy. Plan for higher living costs by assuming different inflation scenarios of 3 per cent, 4 per cent or 5 per cent and work out how these different rates impact your future cash flow andretirement planning.
Use investment tools online such as the Map Your Money feature in the NAV Planner for different projections of inflation rates andinvestment yields to stress-test your finances and identify gaps early.
6. Don't forget about insurance
The Covid-19 pandemic has increased awareness that taking care of ourselves and attending to our health are more important than ever. It may be tempting to cancel or reduce your insurance coverage to lower monthly expenses, but the last thing you want to worry about in a health crisis/accident is how you can pay for your medical costs.
Healthcare and insurance spending will likely play a bigger role in our financial planning since inflation will increase healthcare costs as well. Note that there will be changes to the use of MediSave and MediShield Life for cancer treatment from next month.
As a guideline, we recommend our customers to have a suitable hospitalisation plan, a basic life cover of about nine to 10 times your annual income, as well as about five times your annual income in critical illness cover.
7. Increase your income
Finding ways to earn extra income can help to relieve some of the pressure from the increased cost of living.
If asking for a pay rise is not quite possible, you can explore various sources of side income.
Some examples include tutoring, using your car for private hire, selling items that you no longer use or baking.