This article was produced in collaboration with the Ministry of Finance. All views expressed are the independent opinion of DollarsAndSense.sg
We all spend money. Whether it’s for a morning coffee, public transport, a year-end holiday or unexpected purchases, spending money – and lots of it! – is inevitable in modern life.
When we think about it, every dollar that we spend today can come from a few key sources: 1) past savings, 2) present income, or 3) future borrowing.
What We Spend Today Isn’t Always Based On What We Earn Today
It’s easy to assume that what we spend on is based on what we earn each month. But that’s not always the case, especially for important, big-ticket purchases.
For example, if you are a new homeowner, you may be spending thousands on renovations. Ideally, you should have already saved the funds needed for the works. This means you are spending money today based on cash reserves set aside in the past.
If you didn’t save enough, you may need a renovation loan. What this means is that you are spending money today by borrowing from your future self, because you have to repay the loan eventually. And assuming your income stays constant, you will have less for yourself in the future each month.
So, the questions we should ask are: When is it okay to tap on past savings to buy the things we want today? When should we borrow from our future selves to pay for what we want now? And when should we cut back on present spending and keep within each month’s budget?
Recurring Expenses Should Be Paid For Through Regular Income
As a rule of thumb, we should pay for predictable, recurring expenses using one’s regular income.
During our working years, such an income stream would mean your salary, and perhaps additional dollars from investment dividends or property rental. During retirement, it could include regular payouts through annuity schemes such as CPF LIFE.
Regular monthly expenses could cover food, transportation, utilities, subscriptions and leisure.
Because these are regular expenses, it wouldn’t be sound to tap on our savings. Doing so wouldn’t be sustainable, since it’s a matter of time before the savings are drained, unless you can guarantee constant increases in your savings and investment pot.
Neither would borrowing be feasible, since we could end up accumulating more debt and interest costs over time.
In the same way, though on a larger scale, the Singapore government also practises steady fiscal discipline. The budget for recurrent spending like healthcare, education and defence are funded through recurrent revenue sources like corporate tax, personal income tax, and the GST.
And whether as a household or as a country, if recurring expenditure is expected to increase over time, it’s necessary then to ensure that there is sufficient regular income or revenue to cover the cost.
Unexpected & Urgent Purchases Can Be Paid For Using Our Savings
We are taught since young to save for a rainy day. This rainy day fund can come in handy. We may have to make unexpected large purchases, such as replacing a spoilt laptop.
Sudden crises could also happen. If there is a medical emergency, we shouldn’t hold off treatment just because we can’t afford it right now. Besides insurance, the logical step is to dip into our savings.
Likewise, if we suddenly find ourselves jobless, certain monthly expenses will still need to be met. Rather than borrowing, we can tap on our savings. Once we resume working, we can rebuild our rainy day fund.
Read Also: How Much Should My Emergency Fund Be?
Similarly, consider how the Singapore government dipped into the nation’s reserves in 2009 during the global financial crisis, when it sought the President’s approval to withdraw $4.9 billion from past reserves for the first time to fund the Jobs Credit Scheme and the Special Risk-Sharing Initiative.
The total amount drawn eventually was $4.0 billion, less than expected. In February 2011, with an economic recovery, the government ploughed the amount back.
It’s clear that tapping on our savings can help us through difficult periods. However, this is only possible in the first place if we had been disciplined in the past to save up during good times and not spend excessively.
This same approach is evident in the use of the net investment returns contribution (NIRC) from the national reserves. The NIRC is now the largest contributor to Singapore’s revenue, more than any single tax. Singapore is only able to supplement recurrent revenue with contributions from the reserves because previous generations had set aside savings and surpluses.
Borrowing From Our Future-Self
Many are uncomfortable about borrowing, and for good reason. Growing up, we have often been taught that if we want something for ourselves, we ought to save up towards it.
So, when is it okay to borrow?
Consider those items that would be of value to us – now and in the years to come.
We can borrow not just when the cost is beyond us today, but when the benefits will last us into the future. Such expenditure include buying a home and pursuing higher education.
In short, using money from our future selves makes sense when what we spend on are long-term investments that have positive implications in the long-run, and which would benefit ourselves.
Singapore practises a similar approach towards infrastructure development.
As shared by Finance Minister Heng Swee Keat in his 2019 Budget speech, the government is studying the option of using debt as part of the financing mix for long-term infrastructure projects.
The reason, the minister explained, is that these large investments do not only benefit Singaporeans today, but future generations as well. That’s why it is reasonable that future generation play a part in funding them.
Learning From Our Nation’s Fiscal Discipline To Guide Us On Our Spending Decisions
While most of us will never need to prepare a budget catering for millions of people, there is a lot we can learn by observing how Singapore manages its national budget:
Recurring expenses should best be funded via regular income. Dipping deeply into savings or borrowing to fund recurring expenses is unsustainable. If our regular income cannot cover recurring expenses, we need to cut spending or increase our income.
For unexpected one-off expenditure, it makes sense to tap into savings. This allows us to fall back on our cash buffer to address critical needs like health emergencies. At the same time, it’s prudent to return the funds withdrawn once we can.
When it comes to making an investment that benefits our future-selves, it can make sense to borrow.
Whether it’s for nation building or personal expenditure, sustainability is the key. Ensuring that we spend money in the right, responsible way will go a long way in helping us keep our finances in good order.