Prudence will help us ride out slowdown ahead

The Singapore Flyer against the CBD skyline.
The Singapore Flyer against the CBD skyline. PHOTO: ST FILE

It was with a sense of foreboding that I read the latest releases of economic indicators ("IMF cuts global growth forecasts for a second time"; Oct 7, "Recession risk lingers as S'pore confronts growth headwinds"; Oct 15, and "Office rents and values down in third quarter"; last Saturday).

As an open economy, we are vulnerable to the vagaries of economic cycles. When times are good, few of us think of them ever ending. We ride the market exuberance for fear of missing out.

But the good times always end. With the headwinds we see now, it is time to hunker down and prepare for it.

When times are bad, the lifeline we rely upon, such as salaries and passive rental income, may be threatened. The attendant lifestyle comforts that relied on them may need adjustments, even an overhaul.

It is not that different managing country, corporate or personal finances. Do not overstretch. At all times, maintain a buffer to cushion one from economic cycles.

Things can change quickly. Globalisation has made economic cycles sawtooth-like and shorter, as opposed to the broad bandwidths of past eras. The future is harder to predict.

It is time to discern needs from wants. With a withered-down list of minimum needs, we can see more clearly how long our buffers can sustain us. We may even consider an alternative source of income - letting out a room, offering tuition, and having one's spouse or older children take on full or part-time work.

It may be a good time to consolidate one's skill set to prepare for the next upturn.

There are many public and private schemes available for us to polish up our resumes.

We should be humble to learn and reinvent ourselves to stay relevant.

If we look back at past crises of 1997 and 2008, we can see an uncanny resemblance between them - debt.

It may prove tempting to take out a second mortgage to finance an investment property in the hope of generating passive rental income.

Valuations move in tandem with economic cycles. In lean times, tenants are harder to come by. They are less willing to commit to long leases or pay one's desired rentals.

If we think we can rely on prospective rental receipts to service the mortgage loan, we may be disappointed. The investment property may even turn negative in net asset value when the outstanding mortgage exceeds the tumbling valuation of the property.

With prudence, we will be prepared for the slowdown ahead.

Lee Teck Chuan

A version of this article appeared in the print edition of The Straits Times on October 27, 2015, with the headline 'Prudence will help us ride out slowdown ahead'. Print Edition | Subscribe