Navigate your financial future

If interest-free instalment plans make it easy to spend, digital tools make it simple to save

Online banking tools make it easy to automate regular savings from your salary

To ensure that you save first and spend later, pay yourself first. Set aside a comfortable amount to save every month from your salary.
To ensure that you save first and spend later, pay yourself first. Set aside a comfortable amount to save every month from your salary.PHOTO: GETTY IMAGES

While the world has been dealing with the Covid-19 pandemic since last year, another problem affecting the financial health of Singaporeans has been gaining ground — buy now, pay later (BNPL) schemes.

BNPL refers to a split payment plan (similar to an instalment plan as most of us would know it) that buyers who may not own a credit card can leverage for their purchases. 

The schemes are offered online for purchases of what seems to be any product, including clothes and accessories.

The concept is to split a transaction into smaller repayment amounts over a specified period of time, making pricier purchases appear more affordable.

BNPL providers are currently not regulated, which means they do not need to check the age of the buyer, or that the buyer has a minimum income, which may lead to spending beyond one’s budget.

Overspending has never been specific to any demographic, though the young tend to get a reputation for over-indulging, perhaps due to their penchant for online shopping.

But not all young people are irresponsible spenders. For example, Ms Janet (not her real name) and her boyfriend have managed to save enough money over the past 20 months to put down a deposit to buy their own home.

Ms Janet’s father is quite amazed and proud that his daughter — who is in her early twenties and works in childcare — has been so prudent with her finances. He himself has never had much savings.

The way he tells it, at one point in his life, his parents had to rescue him from bankruptcy after he overspent and maxed out his credit cards.

In addition to having two cars, he always had to have the top-of-the-line refrigerator, the latest iPhone, and luxe holidays — fuelled by easy credit and interest-free instalment plans.

Saving yourself from the click and buy trap

So how do we emulate Ms Janet’s example of saving first, spending later, especially when it is so easy to click and buy online?

Pay yourself first, said Ms Lorna Tan, head of financial planning literacy, DBS Bank.

“With this approach, the priority is to save before you spend. Work out a comfortable amount to save every month and set aside this sum immediately when you receive your salary,” said Ms Tan

With online banking, you can automate this monthly transfer to take place after your payday, she said. By doing so, you can achieve your savings target even before you start spending.

Young adults can also make their savings work harder for them by using a personal deposit account that rewards them with higher interest when they transact with a bank in more than one way, said Ms Tan.

At DBS, customers can clock higher interest rates for their savings through the DBS Multiplier account by crediting their salary, using a DBS credit card and investing in DBS products like Invest-Saver. Moreover, fall-below fees are waived for first-time customers and those aged 29 and below.

If you are focused on setting aside a fixed amount of savings each month, the POSB Save As You Earn (SAYE) Account can be an option. With the POSB SAYE account, you can credit your monthly salary into a POSB/DBS account and select it as the debiting account for your monthly savings contribution — from $50 to $3,000 (in multiples of $10) — into the POSB SAYE Account. 

This gives you an additional 2 per cent per year interest on the amount that you decide to save monthly from your salary to help you achieve your financial goals, provided no withdrawals are made in the first two years of opening the account.

Paying yourself first

How much to save? The recommended guideline is to save at least 10 per cent of your monthly gross income, said Ms Tan.

For young adults entering the workforce, this figure is likely to range from $300 to $500, which is a manageable figure to aim for.

DBS data shows that customers in the 25 to 30 age group save between 10 per cent and 15 per cent of their monthly salary on average across all income ranges.

“This clearly indicates that our customers do have good financial habits and realise the importance of saving.”

As a rule of thumb, individuals should set aside three to six months’ worth of monthly expenditures as an emergency cash fund for rainy days. 

If your monthly expenditure is $1,000, you’ll need to set aside $3,000 to $6,000 so that your daily life will not be disrupted by unexpected events. 

This gives you a buffer in the event that you have to make unforeseen payments. It also avoids the undesirable situation where you may be forced to liquidate your investments prematurely, just to raise cash.

For those who have dependants or are gig economy workers, it is advisable to have six to 12 months of emergency cash set aside. It is prudent to invest surplus cash only after you have set aside your emergency funds and catered to your basic insurance needs.

Once you have surplus cash, you can think about how to invest.

It is not rocket science because banks like DBS have begun to democratise wealth management with the use of technology. This has made portfolio management services, which were previously the preserve of the rich, accessible to the masses.

The DBS digiPortfolio, launched in 2019, is a painless way to invest. While the minimum investment is $1,000, subsequent amounts are as little as $10.

In the bank’s Q1 results, DBS chief executive Piyush Gupta said that the bank has been “promoting the democratisation of wealth management by extending its offerings to retail customers”.

Retail customers comprise 15 to 20 per cent of DBS’ wealth management income. 

“We’re also seeing more digital adoption of wealth products in the first quarter, both for equities and unit trusts. Digital customers grew substantially more than non-digital customers,” he said.


Unchecked spending schemes under review

Earlier this year, buy now, pay later (BNPL) schemes came under scrutiny for how freely they were being offered online for purchases of just about any product.

In April, the Monetary Authority of Singapore (MAS) said it was reviewing BNPL schemes, the Straits Times reported.

"The potential benefits and risks for Singapore consumers have become more relevant," said a MAS spokesperson.

"We are thus reviewing the appropriate regulatory approach for such schemes, and we have reached out to the industry to gather information on their BNPL business and developments in this space."

The review will weigh the benefits that new payment models can bring to consumers and businesses, while also looking at how to discourage runaway debt. 

This is similar to how the total debt limit of a credit card is capped at 12 months of salary for someone whose annual income is below $120,000.

If a regulatory framework is needed, the MAS said it will be risk-proportionate and evenly applied across all BNPL providers to lower the debt risks for consumers.

The writer, an ex-Business Times journalist, has found it all too easy to click and buy when she reaches for her handphone, especially during her recent 14-day SHN quarantine.

This is the sixth of a seven-part series in partnership with DBS