The Straits Times says

Proper uses of a 'rainy day' fund

Lax control over a nation's reserves, as over hard-gained personal savings, would be ruinous. A nest egg is meant to see one through abnormal times - the proverbial rainy day. By definition, such times, like a natural calamity, war or financial crisis, cannot be predicted. The damage they cause can be foretold even less. Hence, precise rules on how to use reserves cannot be drafted. Society as a whole must be wise in husbanding a critical resource so that it is not eaten away over time. As balances shrink, so will income from reserves which play a key role in balancing the Budget.

While logic might caution many to exercise care before raiding precious savings, people are often swayed by the "wealth effect". This is the tendency among consumers to spend more when property prices or stocks are appreciating - because buoyant prices make them feel wealthy. Often, the risk of investments depreciating over time is not adequately weighed. Consequently, demands will arise to use more of the savings for immediate expenses like healthcare bills. If the everyday need for money is deemed an acceptable use of the reserves, recurrent spending will then drain the reserves inexorably and make it nigh impossible to halt the bleeding.

TO READ THE FULL ARTICLE

Thank you for reading The Straits Times

You have reached one of our Premium stories. To continue reading, get access now or log in if you are a subscriber.

What is Premium?

A version of this article appeared in the print edition of The Straits Times on March 07, 2018, with the headline 'Proper uses of a 'rainy day' fund'. Print Edition | Subscribe