The ongoing Covid-19 outbreak has ravaged the economy and crashed the stock market. MAS has forecasted that the Singapore economy will contract more than 4% this year, which is worse than during the Global Financial Crisis. You might be personally affected too as people are losing jobs and taking pay cuts—especially those working in travel, aviation and retail sectors.
Singapore’s daily cases still average between 400 and 800 at the time of writing, although the majority are from foreign worker dormitories and cases among Singaporeans and PR have fallen to 10 and below.
As cases and deaths climb globally, the situation looks bleak. But Covid-19 also presents important lessons on what to do with our savings to prepare for a crisis.
Keep your emergency fund liquid
The first step of financial independence is to keep an emergency fund. This money is meant for unexpected events, such as disasters, accidents and economic downturns. As a general rule of thumb, your emergency fund should cover 6 to 12 months worth of essential expenses, such as bills, mortgage, food and transport.
When the risk of losing your job like many others, having an emergency fund keeps your mind relatively at ease. You would be able to tide yourself over for several months. During this period, you can find a new job or take on some side jobs to support yourself.
Worryingly, only 55% of Singaporeans can continue covering their living expenses for more than 6 months in the event of loss of their main source of income, according to Gobear Financial Health Index (FHI). The index surveyed 1,000 middle-class individuals between 18 and 65 years old to understand financial health in October 2019 across four markets: Singapore, Hong Kong, Indonesia and Thailand.
Even if you’re part of the other 45%, you can start saving for your emergency fund now. Also, it should be kept relatively liquid in a high-interest savings account rather than in stocks and other investment products. You could also keep a part of it in short-term fixed deposits to grow it, so that if need be, you can draw it out in 3 to 6 months.
According to the FHI, 48% of Singaporeans channelled their savings into financial products. That is not a bad thing, but putting all your savings in investment products can be a dangerous move, especially when the economy contracts like during the Covid-19 break.
Without an emergency fund, if you lose your job and face cash flow constraints, you might then be forced to sell your stocks at a much lower price than when you bought it. The S&P has crashed more than 20% from its peak, and apparently, according to a Goldman Sachs analyst, we may see a 40% drop in stocks over the rest of the year. Essentially, your emergency fund not only provides for day-to-day expenses in the event of emergency, but it also secures your holding power as an investor during a downturn.
Diversify, diversify, diversify
And when investing your savings, make sure you diversify. In a crisis like Covid-19, it is clear that not all sectors are equally impacted. On the one hand, Singapore Airlines have cut 96% of their flights, made their staff go on compulsory no-pay leave and introduced deeper pay cuts. On the other, Sheng Siong’s Q1 profits were up by nearly 50%. Zoom, the popular conferencing app that companies and schools are using to work from home or do home-based learning, have also done well during this period.
You can learn from this experience. When investing, put your money into a diversified portfolio of stocks, property and bonds. Or, use different ETFs (exchange-traded funds). This way, when one sector fails, another sector might do well.
Continue investing for retirement
Covid-19 or not, the rising costs of living are likely to continue. Perhaps during this time, investors should be cautious. But if total debt is within control and loved ones are safe and insured with insurance, it is a good idea not to sell existing investments during an economic downturn. Past records have shown us that stock prices will eventually recover as the economy recovers, it is just a matter of how long.
At the same time, it is also a prime time to buy. As famous Warren Buffet always advises, “Buy low, sell high”. There isn’t a better time than a recession to pick up discounted stocks.
In the long-term future, investing is important for growing money for retirement. However, according to the FHI, many people are still too conservative in Singapore and it is still not seen as a need for a significant portion of people. Some base their needs on current financial power and prices, which will change when one ages and prices inflate over time.
Only 48% of Singaporeans channelled their savings into investment products. A third of Singaporeans have insufficient planning for retirement. Despite highest financial literacy rates in Southeast Asia, 40% of Singaporeans acknowledge that they lack an understanding of financial optimisation, and another 25% of them do not know when or how to start planning.
If you belong to the “sandwiched generation”, who have children and parents to care for, you need to pay more heed to invest when you can. More than 1 in 3 millennials believe they will need to support their children as well as their parents financially during retirement. Also, 5 in 10 Singaporean millennials are not on track to achieve financial goals. Half of them except that they will be carrying debt or a mortgage after they retire. Learning how to grow your money safeguards against inflation and also can help you reach your financial goals faster.
Living through the Covid-19 situation is a difficult and scary experience, but with cities on lockdown and cases on the decline, we can expect to come through at the end of the tunnel.
So, take the downtime to learn about investing and re-align to your financial goals. And when we are out of the woods, make sure you keep these important lessons you have learnt in mind and continue growing your finances.