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It’s a well-known fact that we tend to make sub-optimal decisions when we are under stress.
Compared to recent years, 2020 has been an exceptionally difficult year. Whether it’s being laid off from a job, struggling to cope with our work-from-home routine or experiencing cabin fever as a result of the circuit-breaker, it would not be an overstatement to say that 2020 has not gone according to plan.
Some of us may also be experiencing financial stress in our lives. According to the Ministry of Manpower (MOM), there have been 11,350 retrenchments in the first half of 2020, with a further 81,720 employees being placed on short work-week or temporary layoffs. Besides the retrenchment, finding a job has also become more difficult, with MOM estimating that there are only 0.57 jobs for every unemployed person as of June 2020.
A little financial stress can be a good thing if it jolts us into taking actions that we ought to. For example, if we feel money is a little tight and that motivates us to try harder to find a job, this isn’t a bad thing. However, if the stress leads us to make bad financial decisions, we need to be wary about it.
Making bad financial decisions because you are stressed out isn’t a trivial matter. If we make an ill-advised decision to eat a heavy fast-food supper at midnight, the likely consequence is that we may have a bad stomachache the next day. With financial decisions, the effect can have long-lasting consequences.
Here are 5 financial mistakes that we want to avoid making in 2020, even if we undergo financial stress.
#1 Trying to cut your monthly expenses by reducing your essential insurance coverage
Even during a recession, our insurance coverage remains the same. The weaker economy doesn’t reduce the chances of us getting sick or having an unexpected accident. If we have bought insurance coverage to protect ourselves and the people around us, we need to retain this coverage even during bad times, not just during good times.
This is why we should ensure that our insurance premiums are affordable before purchasing the policy. We need to treat our insurance coverage as a necessary expense during both good and bad times. For example, if we have children, we should buy at least some term life insurance coverage for ourselves. Such coverage will ensure that our children will continue to be financially protected even if we are no longer around to provide for them.
We can also consider restructuring our insurance policies such that we continue to receive similar coverage at a lower premium. Remember, insurance coverage is a necessary expense rather than an investment. We should 1) focus on the coverage that we need and 2) be cost-efficient in the way we get ourselves and our loved ones protected. There is no need to pay more than what we need to.
In a recent My Money webinar 2020 jointly organised by MoneySense, the Association of Banks in Singapore, and the Securities Investors Association Singapore, MoneyOwl CEO Chuin Ting Weber spoke briefly about this topic. She also stressed that if we intend to relook our coverage, we should speak to a trusted financial adviser as restructuring our insurance policies isn’t so simple, and we need to be mindful about our insurability before changing any policies. You can watch her presentation here. (19:00 onwards)
Lesson one: Prioritise both your insurance needs as well as the affordability of your insurance policies. You want to ensure that you can afford the premiums during both good and bad times, rather than to reduce your insurance coverage when you can no longer afford it.
#2 Borrowing more to pay for our loans
Unfortunately, some of us may have found ourselves out of a job or having to take a pay cut this year. In this instance, we may struggle to make the monthly repayment required on the loans we have taken.
We should remember to avoid making the mistake of taking another loan – such as a personal loan – so that we can make the monthly repayment on our first loan. While this might give us short-term respite, the result is that it creates a bigger problem for us in the long run, since we now need to service two loans instead of one.
We need to solve our problems at its root. If we have over-extended ourselves financially by buying a car we can’t afford, we should solve the problem directly by selling the car, not take another loan to pay for it. Alternatively, as shared by Lorna Tan, Head Of Financial Planning Literacy at DBS (40:06 – 1:06:08), there are some temporary relief measures for housing, renovation and student loans that borrowers can consider applying for to help them tide through. Homeowners can also consider refinancing or repricing their home loans to reduce their interest rates if they are out of their lock-in period. That said, we need to be aware of the additional interest costs that we may incur when we defer our loan repayments, or other costs which we may incur when we reprice or refinance our loans.
In the My Money webinar – Managing Your Money, Credit Counselling Singapore General Manager Tan Huey Min shared that one of the ‘Don’ts’ of managing your finances during this period is to be borrowing to pay for other loans.
If you are having problems managing your debts or would like to help someone else who is having this problem, do watch the video (1:06:30 onwards) to get more advice on what you can do during this period to manage any debt.
Lesson two: Don’t borrow money to pay off other loans. It just creates a vicious cycle rather than to solve your problem at its root.
#3 Using instalment plans or credit cards to pay for things we no longer can afford
Many of us are used to a certain standard of living. This could include dining out at restaurants regularly with the family, going on overseas trips or staycations or taking taxis and private-hire cars to travel around Singapore.
When we are working, time with the family is likely a commodity that we treasure. Taking a cab to save time could be money well spent. Likewise, having an enjoyable Friday night dinner with the family could be money (and time) well spent. These expenses could be an integral part of our lifestyle.
However, if we are faced with a significant change in our financial circumstances, we need to adapt quickly. For example, if we have lost our jobs, insisting on our weekly Friday family dinners at a restaurant could be something that we should put on hold. Likewise, discretionary expenses such as taking taxis regularly or booking staycations should stop for the time being.
However, the ease of access that people have to credit these days might make it hard for us to adapt quickly. Even if we can no longer comfortably afford some of these discretionary expenses, we still have the option to pay for them through a credit card or an interest-free instalment plan first.
By itself, these financing solutions are good – as it gives us access to credit and additional flexibility to pay for our purchases. However, they may exacerbate the problem by leading us to continue spending on some of these things when we can no longer afford it.
If you are facing financial stress, avoid the temptation of buying new things using an instalment plan. That’s because if you are unable to repay the borrowed money in full and on time, you incur hefty interest charges, which will only make your financial situation worse.
Lesson three: Avoid paying on credit or using instalment plans if you are already having cash flow problems.
#4 Taking On Opportunities That Sounds Too Good To Be True
When we face financial challenges, it’s understandable that we would actively be on the lookout for solutions to our problems. We may be more receptive to job offers, investment opportunities, or deals that appear too good to pass on.
Unfortunately for us, those who are looking to scam us of our hard-earned savings also know this and will design elaborate and appealing scams. This could be in the form of an investment opportunity, an e-commerce deal that sounds too good to be true, or even a ‘job opportunity’ that ‘requires you to receive funds and to transfer funds to others’ (i.e. a money mule scam).
There are many different kinds of scams in Singapore. ScamAlert, a website by the National Crime Prevention Council (NCPC) has a designated page listing down some of the most common types of scams in Singapore. You can also watch this My Money webinar – Staying Digitally Safe, when Carolyn Misir, principal psychologist at the operations and forensic branch of the Police Psychological Services Division of the Singapore Police Force shared some of the psychological factors why people fall for scams (50:00 onwards).
Even as we seek opportunities during this period, we need to be vigilant of the kind of scams that may be going on in Singapore. Doing so will allow us to better protect ourselves and our loved ones from falling victim to these scams.
Lesson four: Be wary when an opportunity looks too good to be true.
#5 Being too greedy or fearful when it comes to investing
Emotions can mislead us. This is particularly true when it comes to investments. During a bull run when markets are soaring, everyone wants to invest as much as possible because of the fear of missing out (FOMO). During a bear market when the stock market crash, people end up waiting on the sidelines, afraid to invest as they are worried that their investment portfolio will decline. Neither action will help us as an investor.
As shared by Vasu Menon, Executive Director, Investment Strategy at OCBC Bank’s Wealth Management unit during the – My Money webinar 2020: Managing Your Investments, 2020 has been an extremely volatile year for the financial markets.
The world’s economy is expected to shrink by about 4.9% in 2020, which is much worse than the 2007/2008 global financial crisis when it shrunk by 0.1%. Economic data around the world is likewise showing dismal results. From 24 February to 23 March 2020, major indices such as the S&P 500 took a huge beating. Within a 30-day period, the S&P 500 declined by about 30%. Many investors were rightly shaken, and some may have quickly exited the market during the downturn.
The most unexpected thing occurred thereafter. After a disastrous Feb/Mar 2020 period, markets rallied, with indices such as the S&P 500 breaking pre-COVID-19 highs. According to Vasu, the market rally can be attributed to three factors – 1) Hope – that a vaccine could be found soon and that the economy will reopen, 2) Fear – for investors who are worried that they will miss out on the rally if they don’t invest now and 3) Liquidity – due to record low interest rates and quantitative easing from the Fed.
No one could have predicted how quickly the markets recovered. If we are afraid of investing when the market crash and are now rushing to jump in when the markets are peaking (again), then we run the risk of letting our emotions rule our investment decisions, which is not ideal in the long-term.
To catch the full presentation by Vasu Menon, you can watch it here (7:45 to 30:45).
Lesson five: Market movements are unpredictable. As such, avoid timing the market and focus on long-term investing instead
You can watch the three My Money 2020 webinars by clicking on the links below.
Managing your money, https://www.facebook.com/MoneySense/videos/219507186170026
Managing your investments, https://www.facebook.com/MoneySense/videos/1270757509958591
Staying digitally safe, https://www.facebook.com/MoneySense/videos/809416446265911