5 Ways to Reduce Your Financial Risks in Singapore

With Covid-19, many Singaporeans are worried about their financial situation. Some may already be experiencing difficulties, such as lower income or a risk of job loss. The good news is, there are simple steps we can take, regardless of the situation in the economy, to minimise our financial risks, especially in these volatile times. Here are some suggestions that you may consider implementing in your own life, while you are still in good shape financially.

How do we lower our financial risks?

• Minimise the use of credit facilities
• Do your best to maintain a positive cash flow
• Obtain comprehensive and affordable insurance
• Enhance our existing emergency fund
• Switch to lower-risk investment options

Minimising the use of credit facilities

It can be tempting to use a lot of credit during emergencies, as they seem to provide an immediate solution to problems. However, it’s important to remember that credit doesn’t ultimately solve a problem, but merely postpones it.

For example, if you take a 5-year loan of $5,000 to pay your bills right now at an interest rate of about six per cent per annum, this is a repayment of about $96.60 per month. By the end of five years, you would have paid close to $5,800.

As the interest rate from different loans pile up, there’s an increased risk that you’ll miss or default on repayments. It also invites legal complications; you can be taken to court for non-payment. This has wider repercussions later, such as on your career or your ability to buy a home.

It’s better to cut costs, resell goods you don’t need, and rely on savings rather than use credit. A good way to determine if your debt is under control is to speak with a financial consultant – they can help you to assess certain things like your monthly debt-to-income ratio. This is the ratio of your monthly repayments to your monthly income (e.g. if you earn $4,000 per month, but your total bill payments come to $900, this is a debt-to-income ratio of 22.5 per cent).

Doing your best to maintain a positive cash flow

Your personal cash flow refers to your income, versus the amount of money that you pay out each month. Negative cash flow can severely your financial risks, as you won’t have cash in hand to deal with emergencies. It can cause you to take on debt (see point 1), by using credit for immediate repayments.

Being short on cash can also force you into financially damaging decisions, such as having to surrender your insurance policies at a loss, or having to sell off your investments during a downturn.

As such, you should do your best to keep your cash flow positive in uncertain times. Speak to a financial consultant to analyse your current situation. Understanding cash flow will guide how much you can invest right now, and what sort of products you should invest in.

Obtaining comprehensive and affordable insurance

Apart from having hospitalisation plans, consider having more comprehensive protection. For example, you can back up your protection by having critical illness (CI) coverage. CI plans provide a pay out if you suffer from serious conditions, such as a stroke or cancer. Your hospitalisation plan only covers the hospital bills, and term and whole life insurance usually pay out to your beneficiaries after you pass on.

You might also consider disability income Insurance, to replenish part of your income if you’re injured and unable to work. This can provide up to 80 per cent of your usual income, giving you time to recover while keeping the bills paid.

Every dollar counts in a difficult economic situation – so you want your insurance plan, and not your bank account, to cover unexpected emergencies. And as we’ve mentioned in point 1, you want to avoid the use of credit. Being well-insured means you don’t need to borrow money due to medical reasons. Besides sufficient protection, however, you should ensure that your insurance policies are affordable. There’s no point purchasing a policy, only to let it lapse because it costs too much to maintain.

If your income situation changes, and you can’t pay your premiums, contact your financial consultant rather than letting it lapse. Some insurance plans, such as Investment Linked Policies (ILPs), allow you to take premium holidays while your finances recover.

Enhancing your emergency fund

A sufficient emergency fund is commonly considered to be at least six months worth of expenses in savings. It may not be a good idea to keep more cash than that, as you could face inflation rate risks (savings accounts typically have very low interest rates, such as 0.125 per cent, so the emergency fund provides for crises but doesn’t really grow).

However, you can be flexible if you see difficult times ahead. If your employer is already warning of potential cost-cutting, for example, it may be time to ramp up your savings. Likewise, you may want to bulk up on your savings if:

• Other family members, such as parents or your spouse, have lost their jobs
• You work in an industry that faces a high amount of risk (during the Covid-19 period, these industries include aviation, tourism, and retail)
• You foresee long periods before your industry recovers, even after the passing of the crisis
• You have been warned of critical health problems via early detection, such as cancer
• You are facing any form of pending litigation, or issues such as divorce

In most cases, this will mean trying to raise your emergency fund to cover a longer period (e.g. 12 months of your income). In some cases, this might mean redirecting some of the funds you normally use for investment into simple cash reserves, until the crisis is past.

Switching to lower-risk investment options

The wider economic situation can impact some industries or countries much more than others. This might mean having to look into your portfolio, and shift from more risky assets to safer ones.

With ILPs, you have the option to switch your sub-funds to less risky options. A financial consultant can guide you on making the right choices for your risk profile.

Otherwise, you can talk to your financial consultant on shifting a more defensive allocation, such as moving more toward bonds, or absolute return products like endowments in volatile times. Don’t forget that you also have access to voluntary CPF top-ups, which are guaranteed by the government (although you cannot move the funds again once you’ve put them in CPF).

Take proactive steps, and don’t avoid meetings with your financial consultant

Keeping your finances safe is an ongoing process. There is no one fixed solution that applies for all time and in all situations. As such, do meet up with your financial consultant regularly, and take proactive steps to lowering your risks. During this Covid-19 period, it’s important to protect your financial health as well as your physical health.

Disclaimer:

This article is for general information only and does not take into account the specific investment objectives, financial situation or needs of any particular person. The views expressed herein do not necessarily reflect the views of AXA Insurance Pte Ltd and should not be construed as the provision of advice or making of any recommendation. There is no intention to distribute, or offer to sell, or solicit any offer to purchase any product. We recommend that you seek the advice of a qualified financial advisory professional before making any decision to purchase an insurance or investment product. Whilst we have taken reasonable care to ensure that all information provided was obtained from reliable sources and correct at time of publishing, information may become outdated and opinions may change. We are not liable for any loss that may result from the access or use of the information herein provided.