How can you cut expenses to boost savings? Here are 4 tips

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SINGAPORE - The pandemic has been a struggle for everyone, but it has at least given us three valuable insights as to why everyone needs to take financial planning seriously.

 

This is especially so when many people don't keep tabs on their expenses and end up not saving enough for the long term.

 

Top of the list is the importance of having a good retirement plan because just like how Covid-19 struck suddenly, there is no telling what kind of catastrophe could befall you in the future.

 

You might have a decent job that gives you a steady income now, but that is not good enough. Indeed, many people have this unrealistic idea that as long as they keep working, things will be fine.

 

But guess what? There is always a risk that your job - and therefore your income - will be affected by some unforeseen calamity and, when that happens, it's your personal reserves that will save you in the long haul.

 

If you think that it is already quite tough trying to make ends meet when you are working, imagine what it would be like in two or three decades when you stop earning an income. This is why the planning has to start now - the earlier you start, the better the chances of you having enough money to spend tomorrow.

 

The next pandemic lesson is the importance of having good insurance coverage, especially for medical and hospitalisation charges. No one will disagree now that our health is more valuable than our wealth.

 

So it is essential that you set aside enough to ensure you can have the best healthcare that your money can buy. Private hospitalisation plans do not come cheap, with annual premiums for some policies ranging from $10,000 to $20,000 or more when you are in your 70s and 80s.

 

It is therefore vital to plan for such future expenses so that you don't end up losing the coverage in old age, when you will need it most.

 

Finally, even after you set a target for your retirement kitty, add 20 to 30 per cent more to your number because you should also learn to expect the unexpected.

 

Just look at how disruptions to supply chains have sent the prices of energy, food and other items soaring. You can expect more of this in the future if not enough effort is made to keep the planet from ailing further.

 

Yes, there seems to be no end of bad news these days, but the good news is that this is what financial planning is all about - preparing for even the worst-case scenario so that you are still able to survive it relatively unscathed.

 

Not knowing how much you need

 

The recent finding from the OCBC Financial Wellness Index shows that 81 per cent of people here - three percentage points higher than last year - underestimate their own needs for retirement by a third.

 

It is like you set aside $3,000 for monthly expenses in retirement when you actually need to spend about $4,000.

 

This is because you forget to factor in the price increases of essential items due to inflation as well as large one-off expenses such as replacing old washing machines or TV sets.

 

Also, many people tend to forget to add their monthly insurance premiums. These are usually paid with credit cards or deducted from bank accounts via Giro. These are "invisible" costs when you are working but will be a burden when you are not.

 

There is only one way to check if your numbers are correct - doing an audit and adding up all the cash outflows from your household for a few months so that you can get a good gauge of how much money you need every month.

 

Most people are usually shocked to see how much they spend every month, but this is an exercise you should not delay because the reality is this: If you need $4,000 a month, this means you will need $960,000 just to last you from age 65 to 85.

 

How to increase your savings

 

Don't despair if you feel that it is not within your control to increase your salary and investment returns. The OCBC survey has highlighted four areas that will enable you to tighten the taps so you can spend less and save more.

 

1. Spend within your budget.

 

Once you know how much you need every month, you can allocate a fixed sum and try not to exceed it. Even when you do, you can still enjoy some flexibility in your expenses: If you see your costs creeping up for the month, it's perhaps time to spend the coming weekend at home.

 

Don't be like about a third of the people here who have the tendency to overspend every month.

 

2. Don't spend to keep up with friends.

 

This problem is more acute among those in their 30s. About 20 per cent of them have the tendency to splurge beyond their means so that they fit in with the group, such as dining in expensive restaurants or buying designer wear.

 

By all means, reward yourself once in a while but don't overspend for the sake of friendship. True friends will care more about you than the labels you wear or the restaurants you frequent.

 

3. Don't gamble and invest excessively.

 

The winner of a recent Toto draw took a photograph of his $5 million cheque and that shot went viral on social media. It probably inspired more people to bet heavily for the next draws.

 

This explains why over 40 per cent of people here still have the bad habit of gambling beyond their means every year. Yes, everyone wants to strike it rich but you can still try your luck without breaking your own piggy bank.

 

Try this experiment for a month. If you always bet, say, $20 for each twice-weekly draw, try betting only $10 now and put the other $10 aside. By the end of the month, you will have an extra $80 to spend.

 

This should make you realise that you stand to "win" more every month if you cut down on your gambling.

 

It is the same for investments which are for growing your savings. Not many people can invest full-time and not work unless they are rich to begin with.

 

But over 30 per cent of those in their 20s to 30s are making risky bets beyond their means now, with tips they obtain from social media.

 

Many high-income earners invest, not to escape work but to grow their savings so that they can live comfortably when it's time to stop working. So the secret to a good life for many people is a successful career and prudent financial planning.

 

4. Reduce your credit card debt.

 

About a quarter of people here have credit card debt and what makes it worse is that half of them will always be indebted because they pay only the minimum sum every month.

 

If you have such debt, your No. 1 priority has to be to pay off this loan as soon as possible. Not having enough to pay your expenses is bad but borrowing to pay for your expenses is even worse.

 

So you are not without a choice because every dollar you save by spending less will enable you to have more money.

 

Source: The Straits Times © Singapore Press Holdings Limited. Reproduced with permission.

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