8 Ways for Singaporeans to Recession-Proof Their Finances

The onset of a recession often comes as a surprise to both Singaporeans and the global community. A striking example of this is the swift impact of the COVID-19 pandemic, which, within a matter of weeks, led Singapore into its deepest recession since our independence in 1965.

Given the uncertainty in the economic outlook, it’s crucial to recognise that it's never too late to recession-proof your finances. Once you understand that you have the power to control your money, your worries will ease up as your finances become more well-equipped to weather any economic storm. Here are 8 ways to help you do that.

1. Calm Your Mind

The first thing you should do is to calm your mind, and get into an emotionally stable headspace. Stress increases the likelihood of impulsive spending, inconsistent saving, and other bad financial habits. When our brain is in a panicked state, we have a hard time making good long-term financial decisions.

Besides caring for your well-being through meditation and calming routines, it also helps to recognise that recessions are a natural part of the economic cycle, regardless of what triggers it. Despite the uncertainty surrounding this recession, know that it will eventually come to pass and that the good times will return.

Meanwhile, the Singapore government is lending a helping hand, with measures like the COVID-19 Support Grant and Resilience Budget to help you cope with living expenses and recession-proof your finances during this time. Households get $100 credited to their July or August utility bills, while unemployed, retrenched persons, students, fresh grads, and seniors qualify for additional support from the Fortitude Budget.

2. Pay Off Your High-Interest, Unsecured Debts

The next step in recession-proofing your finances is to settle any high-interest loans, such as your credit card balance. By settling your debts early, you’ll avoid losing your income to high interest rates. Eliminating high-interest debt also gives you some breathing room to boost your emergency fund or make long-term investments.

Even during good times, it’s still good financial practice to pay your credit card bills on time. The less debt you have, the more you can set aside for savings.

At the same time, avoid buying cars or other big-ticket purchases that will cause you to take on new debts. During good times, these major purchases can make sense, but a recession increases the risk of income loss. If that happens, you’ll have a tough time paying off your debt, or have difficulty meeting your living expenses. Defer these big-ticket purchases until the economy gets better.

3. Cut Back on Non-Essential Expenses

Besides saving as much money as you can, another way to protect your money from recession is by cutting back on non-essential expenses.

One way to do this is to look at your bank or credit card statements, and divide your expenses into two categories. The first are essentials, such as your mortgage, utilities, and groceries. These expenses are absolutely necessary for your survival.

Then there are non-essentials, which can be things like subscription services, food delivery, and non-grocery online shopping. While these are comforting to have during tough times, see if you can cut down on non-essential spending or eliminate them altogether until you’ve saved enough for your emergency fund. Then slowly bring these back into your budget.

4. Power Up Your Emergency Fund

As a general rule, your emergency fund should have around 3-to-6 months worth of living expenses. This is especially critical during a recession, where financial emergencies like job loss or pay cuts are more likely to happen. Having this cash buffer will help you and your family weather the next few months as you slowly regain your financial footing.

A survey found that 2 in 3 working Singaporeans don’t have 6 months worth of cash savings to cover expenses if they lose their job. In fact, 18% only have enough savings to last a month.

Your first financial to-do is to power up your emergency fund if you don’t have one yet. Prioritise saving a cash reserve of a month’s worth of living expenses. Then, if you have other financial obligations like paying high-interest debt, pay that off, before saving another 3-to-6 months’ worth of cash. This will help recession-proof your finances by creating a safety net, in case of sudden emergencies.

5. Understand the Basics of Saving for the Long Term

Now that your immediate finances are recession-proof and your present-day financial needs are covered, it’s time to start thinking about how you can meet longer-term financial goals in 5 to 10 years time. Achieving them is all about ensuring that you have the money you need, when you need it – usually at some point in the near or distant future. The two main ways to do this are by saving and investing. 

Many people approach financial goals by simply saving up for them. That’s what we’re taught when we’re little – save up this week’s pocket money and you can buy yourself that toy. 

But with bigger sums of money and over longer periods of time, trying to amass money by leaving it in a savings account is actually an inefficient way of reaching your goals.

The reason for this is inflation. 

Inflation refers to how each year, the price of consumer goods increases a little. It will cost a little more to buy a bag of rice next year than it costs right now. This means the actual value of each dollar in your piggy bank decreases as the years go by.

Now, as most savings accounts pay out very low interest rates, typically lower than the rate of inflation, if you aren’t doing anything to grow your money, its actual value or purchasing power diminishes every year.

Investing offers a more active approach to reach your financial goals by accelerating your money’s growth over time, though of course there’s an element of risk involved.

At its most basic, investing offers you interest that you can compound. Compounding interest, though simple, can help your money grow faster than you might imagine. 

Say you invest $100 and are promised an annual interest rate of 10%. At the end of the first year, you’ll have your capital of $100, plus $10 interest. If you decide to pop that $10 back into the investment, you’ll start your second year with $110 invested. At the end of the second year, you’ll have the $110 that you started with, plus $11 interest, for a total of $121. And so on. 

You’ll keep earning interest on both the initial sum you have invested and all the past interest earned that you pump back in, and your money will grow exponentially.

Compounding interest requires time to work its magic. The longer money stays invested, the higher your yearly gains will be, as a percentage of the original sum invested. Simply put, the earlier you start investing, the more your money can grow. That is why it is important to aim to start investing as early as possible.

One way to harness the power of compounding interest is by investing in a product that enables you to reinvest your gains to accelerate your money’s growth. Some investment-linked insurance products do this, by automatically reinvesting any payouts earned that you don’t withdraw, along with your principal sum. This helps your money grow faster.

Hazlina, a 34-year-old freelancer, started investing this way as a teenager and has never looked back. 

“At the age of nineteen, I made my first investment, an (investment-linked) insurance product that an agent recommended to me, and that really opened my eyes to how investing works. Starting early gave me a big advantage over many of my peers who have only just started thinking about investing,” she says.

To further enhance your financial growth and security, consider exploring the following key strategies:

• Mastering Investment Strategies for Wealth Diversification:
  • Diversify Across Asset Classes: Mix stocks, bonds, and mutual funds to balance risk and potential returns. It's also crucial to explore a range of investing opportunities beyond stocks, which offer growth with higher volatility, while bonds provide stability, buffering against market fluctuations.
  • Diversify Across Industries and Regions: This approach reduces risks tied to specific sectors or regions, ensuring your portfolio benefits from diverse economic growth and isn't overly impacted by localised downturns.
• Navigating Tax Planning for Enhanced Investment Returns:
  • Use Tax-Advantaged Accounts: Investing in accounts like retirement funds can offer tax benefits.
  • Understand Tax Implications: Different investments come with various tax treatments.
  • Seek Professional Advice: To optimise your after-tax investment returns, it’s wise to consult with financial experts.

6. Determine Your Investment Goals

Before you start saving and investing, it is helpful to first determine what your objectives are. For instance, are you planning for a comfortable retirement, paying for your child’s education or saving up for a big-ticket purchase like a home or car? Figuring out your key objectives will help you devise a financial plan that is poised to help you achieve specific goals.

Your next step is to check how much you can afford to invest, while still protecting your money from recessions and other global financial events. First, set aside funds for your daily needs, as well as some cash savings to provide for emergencies. Look at the amount you are left with and ask yourself how much of it you are prepared to invest.

Brandon, a 36-year-old private tutor who is married without kids, has significant monthly expenses, including the home loan on his HDB flat, his car loan, his monthly bills and his allowance to his parents. He invests approximately 30% of his disposable cash in stocks and saves the rest through an endowment plan.

“I had to subtract all these expenses from my monthly earnings when I was signing up for the endowment plan,” he says.

Finally, evaluate your risk appetite and tolerance for losses. Some factors to consider before you start investing include your age, your existing financial commitments and your personality. Investment plans offering high returns are often accompanied by high risks. Savings plans, on the other hand, offer lower risk of losses but also lower returns.

As you refine your investment strategy, it's important to focus on crafting long-term financial goals for sustainable wealth, such as:

• Identifying and setting realistic long-term financial goals, which are fundamental for building sustainable wealth.
• Creating detailed plans for key goals like retirement savings, home ownership costs, or education funds.
• Investing in growth-oriented accounts for retirement or education to significantly impact the achievement of your goals.
• Regularly reviewing and adjusting your financial plan as life circumstances and economic conditions evolve.

7. Understand What You’re Investing In, and the Risks Involved

Before putting your money in any investment product, make sure you fully understand the product and the risks involved. It is a good idea to stick with products and schemes that are regulated by the Monetary Authority of Singapore.

The Singapore Deposit Insurance Corporation protects those who have purchased life insurance policies, endowment plans, annuities and long-term accident and health policies in case of failure of the insurer. All insurers registered by MAS to provide life or general insurance are part of the scheme.

If you wish to invest in foreign-listed products, know the additional potential risks before committing your money.

At Income Insurance, there’s a whole suite of MAS-regulated savings and investment-linked plans that cater to different risk appetites, time periods and budgets.

Alongside understanding investment products, integrating risk management and insurance into your financial plan is crucial to protect your money, especially in a recession. Adequate insurance coverage is just as important as investment in managing risks. Life and health insurance, for instance, safeguard your family's financial future by providing security against unforeseen events.

By familiarising yourself with the different insurance options and incorporating them effectively into your financial planning, it can result in a more comprehensive and secure approach to managing your financial risks.

8. Already Investing? Keep Up Your Contributions

If you already have money in a savings or investment plan, you might be worried about the markets plummeting. However, if you can afford to, try to hold on to your plans, so you don’t waste all the discipline you’ve put into putting that money aside over the years. The long-term payouts of your savings and investments can go a long way toward protecting your money from future recessions and other financial upsets.

You have the power to put yourself in a stronger financial position

Recessions never come at a good time, especially when the Singapore economy was starting to look better following the peak of the COVID-19 pandemic. Regardless of what happens next, remember that there are things you can do to put yourself in a stronger financial position.

Whatever your goals or means, recession-proofing your finances can start today. Evaluate your finances and find opportunities to cut your expenses so you can boost your savings. If you need professional advice, you can connect with our financial advisors.