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SmallChange

Savings to the rescue when big bills come in

Without the buffer, a chronic negative cash flow can force one into desperate debts

The cooler weather and major festivals are what make December and January my favourite months of the year.

But they also tend to leave me feeling poorer. That's because my highest monthly cash outlays also fall in these two months.

In December, there are steep credit card bills to settle. Those wonderful few weeks going on a vacation overseas, shopping for gifts and wining and dining can certainly add up to a hefty amount come the end of the month.

To compound matters, I tend to leave it late when contributing to my Supplementary Retirement Account and do it in one lump sum.

For my latest contribution, I wrote out a cheque for $15,300 - the maximum allowable - on Dec 28, two days before the banks shut up shop for the year. While this is not an expense, it is cash I cannot utilise until I am 62, which is a fairly long way to go. Not that I'm in a hurry to get there.

As for January, it's also a month of major expenses on account of Chinese New Year. Regardless of economic slowdowns, certain expenses such as hongbao money, the costs of the family reunion dinner at a restaurant and the prices of traditional delicacies never seem to go down.

Thankfully, I can usually count on the annual bonus payment in January to soften the blow.

As I have saved up some money over the years, this tug-of-war between income and expense is merely reflected by a series of debit and credit entries in my bank books. Without this savings buffer, I would have a problem meeting my expenses purely from my salary in these two months.

In financial parlance, I was experiencing a negative cash flow.

While it is natural to think this won't happen to us as long as we have a good savings habit, let's face it: No matter how prudent we are in managing our money, there will be certain times when our expenses exceed our income. Think of the time when you make a down payment for big-ticket items such as a flat or a car, or a lump-sum payment to pay taxes, insurance and medical bills or for a wedding. You will almost certainly be in negative cash flow, at least for the short term.

This is fine if it's temporary. But it becomes an existential issue if it's chronic, a problem faced by some low-wage earners.

As the economy slows, there will be more individuals and business owners who will face cash-flow issues.

This is already showing up in economic indicators. For example, a recent report showed that the payment performance of local firms last year was the worst since 2011. At a time when job uncertainty is high and pay increments and bonuses are low, marshalling one's cash resources should take top priority.

As a rule of thumb, most financial experts say you should set aside six months' income as a buffer to meet an unexpectedly large expense or cope with a job loss.

I say it's best to set aside a full year's income, particularly if your other assets are not easily converted into cash.

Property is a good example. This is an asset class that is very much sentiment-driven. In today's tepid market, it's not uncommon for a listed property to languish for months before attracting a buyer. You certainly don't want to be forced into a fire sale or worse, borrow from a moneylender at usurious rates because you needed cash urgently while waiting to liquidate your assets.

This was what happened to company director Goh Meng Leong. According to a recent Straits Times report, Mr Goh took out two unsecured loans totalling $350,000 from moneylender ABK Leasing in 2014.

He had agreed to pay annual interest of 240 per cent, with late interest at the same rate plus a late fee of $10,000 every time payment was missed. This was before changes were made to the Moneylenders Act, which now limits the maximum interest rate moneylenders can charge to 4 per cent a month or 48 per cent a year.

Despite having paid back $700,000, Mr Goh had to fight off a bankruptcy application filed by ABK Leasing in the High Court because the initial loan had grown to $1.6 million, including $1.25 million in interest and late fees.

Fortunately for Mr Goh, the court said enough was enough and threw out the case. But it was a bittersweet victory as he had to sell his HDB flat in stumping up the $700,000.

We were not told why he chose to borrow money from a moneylender at an exorbitant rate that could only lead to an unserviceable debt. But there is little doubt that a severe negative cash flow was the crux of Mr Goh's woes. He may well have underestimated the compounding effect of interest charges - as did a former colleague who, many years ago, shared how he would fret over news of a bank merger as he held credit cards and had access to unsecured lending facilities from every retail bank in Singapore.

Every merger would mean one fewer bank from which to borrow, which was of great concern as he had maxed out all his credit limits. As a large chunk of his monthly pay cheque went into making minimum payments on his credit card bills, I asked how he intended to clear off his debts.

His answer left me flabbergasted: He was waiting to turn 55 so that he could withdraw his Central Provident Fund balance after setting aside the Minimum Sum amount to settle his bills.

I never found out if he paid off his debt this way. If he did, it would have been very painful financially.

A version of this article appeared in the print edition of The Sunday Times on January 15, 2017, with the headline 'Savings to the rescue when big bills come in'. Print Edition | Subscribe