Are you losing the race against inflation?
By Lorna Tan
If you’ve only got a minute,
- The lowest income group and baby boomers are more vulnerable to high inflation.
- Gen X customers who saw their investments grow at a slower rate than their expenses, are encouraged to invest more to boost financial resilience.
- Focus on the things that are within our control to better manage our finances and rise above the ugly head of inflation.
With inflation hitting record highs coupled with ballooning expenses and sluggish income growth, consumers are caught in a bind. But all is not lost as we can focus on the things that are within our control to better manage our finances and rise above the ugly head of inflation.
DBS latest report “Are you losing the race against inflation?” examined the impact of inflation on different consumer segments, analysed income growth, and offered tips on how to combat inflation. It highlighted that the lowest income group and baby boomers (ages 58 to 76) are among the most vulnerable to inflation. As such, these consumers could have less bandwidth to stomach higher inflation rates in the future.
On a positive note, millennials (ages 26 to 41) and boomers are in a better financial position to beat inflation. This is because their investments grew faster than expenses over the past year. On the other hand, Gen X customers (ages 42 to 57), who are near retirement age but saw investment growth lagging that of expenses, could invest more to boost financial resilience and safeguard their nest egg.
The report also indicated that the incomes of nearly half a million DBS customers lagged the surging inflation rate, with some customers even experiencing a decline in real income. This is exacerbated by expenses, which have grown two times faster than income over the past year.
The research paper is the fourth instalment in the DBS NAV Financial Health Series that analysed publicly available data as well as aggregated and anonymised data insights from 1.2 million DBS retail customers. Here are 12 key highlights and 6 financial planning tips from this study.
1. Income is not keeping up with inflation for 40% of our customers. Among the sampled customers, 40% saw their income grow by less than 5% over the past year, which is lower than Singapore’s average CPI inflation of 5.2% in first half of 2022, and DBS’ 2022 CPI forecast of 5.1%.
Figure 1: Customers split by income growth over the past year
2. Lowest income group witnessed the greatest lag in income growth. Customers within the income group earning below $2,500 registered just a 2.5% increase in income between May 2021 and May 2022. Simply put, vulnerable segments of the society are struggling most with high inflation.
3. The silver lining is that there has been upward income mobility. About 23% of the customers who were earning below $2,500 in May 2021 managed to move up to higher income bands over the past year amid the economic recovery, along with the improvement in job prospects and wages. If we consider income mobility effects, then the income growth situation of this income group would appear more encouraging.
4. Expenses have risen as well. Customers are now spending 64% of their income, versus 59% a year ago. The rising proportion of expenses to income in May 2022 suggests that the growth rate of expenses has outpaced that of income. Customers are still spending within their means, although rising expense-to-income ratios suggest inflationary effects and pent-up spending over the past year.
Figure 2: Expenses to Income (%) for an average customer, for May 2021 vs May 2022
5. Increase in expenditure has outpaced income growth by 2x. Overall monthly expenses for sampled customers grew 22.2% in May 2022, compared to their income growth of 11.1%. This is even more so for the lowest income group, who saw their expenses grow 13.8%, which is 5.6x faster than their income growth of 2.5%.
6. There is a need to keep discretionary spending in check amid high inflation. All expense categories saw double-digit growth over the past year. Apart from transportation (+60.2%), spending on shopping, entertainment, and travel, which are discretionary in nature, witnessed the steepest increase (+56.7%).
Figure 3: Expense growth rate by categories, for an average customer
7. Inflation affects everyone differently, depending on individual’s expenditure pattern. The three key drivers of inflation in Singapore have been food, transportation, and housing & utilities, which together account for around 63% of the overall CPI basket.
Figure 4: Weightage of CPI basket, 2021
8. Lowest income group and Boomers are more vulnerable to high inflation, based on their lower wallet bandwidth. We observe that the lowest income group (those earning less than $2,500) spends almost the entirety of their income, with a significantly higher expense-to-income ratio of 94% in May 2022 (versus average of 64%). Among the different generations, the expense-to-income ratio (96%) for Boomers is the highest, thus suggesting a lower bandwidth to stomach higher inflation.
Figure 5: Expense to Income (%), by generation
9. Investments experienced growth over the year. On an aggregate basis, total investments of customers grew 24.5%, outpacing the growth in expenses of 22.2%. However, the main laggards are Gen X customers who saw their investments grow at a slower rate than their expenses, while Millennials and Boomers generally saw their investment growth outpace that of their expenses. There could be more room for growth in investments among Gen Xers given they are near retirement age, which makes investing and financial planning a more pressing priority.
Figure 6: Expenses vs Investment growth by generation
10. There are also signs of “flight to safety” amid recent market volatility. Across all generations and income groups, we saw a shift in investments towards bonds in May 2022 compared to a year ago, with bonds making up 37% of total investments, up from 2% in the previous year.
11. NAV Planner users are more likely to invest, across all generations and income groups. On average, 10% of NAV Planner users invest, versus only 3% of non-NAV Planner users that do. Furthermore, NAV Planner users were found to have more monies invested (based on asset under management or AUM), close to 3x the amount of a non-NAV Planner user.
12. Don’t lose your cash to inflation. The value of money declines more rapidly during periods of high inflation. The rate of inflation outpaces that of the returns earned on bank deposits, translating into negative real returns on cash. Excess cash, if uninvested, is at risk of seeing its value erode during periods of high inflation.
Figure 7: Real value of money under 3 scenarios
What consumers can do
Here are 6 tips to guard against inflation and make your finances more resilient.
1. Review your expenses regularly
- Make it a habit to review your expenses on a monthly or quarterly basis to make necessary adjustments.
- Use the digital financial advisory tool DBS NAV Planner to help you keep track of your expenses and set up a budget that includes saving and spending targets. In today’s environment of rising prices, we are facing the reality of tightening our belts. The report has indicated that transportation, food, and housing & utilities are the three key components hitting our wallets. So, it really helps to understand our individual spend habits. By doing so, we know which areas we can work on to reduce discretionary spend and enhance our financial situation to manage the uncertainties ahead.
- With interest rates heading north, those who are servicing their home loan may consider refinancing or repricing to a more suitable mortgage, if they are out of the lock-in period. Do a cost-benefit analysis first and consult a home loans specialist. Home loan options include fixed-rate, floating-rate, or a combination of both. For new home buyers, do refrain from over-leveraging and maintain adequate funds to tide through at least a year.
- For homeowners experiencing tight cashflows during this period, consider paying off housing loans through your CPF OA account and maintain liquidity. You can always do a voluntary housing refund to your CPF OA in the future when your situation improves.
2. Shop wisely
- Some suggestions: Buy house brand products at supermarkets, bulk buy non-perishables if there is significant discount, consider buying second-hand items, and look out for promos.
- Use credit/debit cards that are more suited to your lifestyle to earn cashback, points and miles.
- Do ensure control over your spending as credit card debts can snowball quickly if they are not well-managed. Pay your bills in full and on time.
3. Inflation-proof your savings
- While emergency cash should be kept liquid, keeping all of your savings in a simple savings account will not preserve your purchasing power, especially in a high inflationary environment. Some possible instruments to consider for the more liquid and low-risk portion of a portfolio, include higher interest-yielding savings account like DBS Multiplier Account, Singapore Savings Bonds, money market funds or endowment insurance plans.
- Beyond savings, you’d need to start investing your money for a better chance at beating inflation and achieving your life goals.
4. Start investing and adopt a long-term horizon
- As a rule of thumb, at least 50% of your net worth (assets minus liabilities) should be invested.
- A regular savings plan like the DBS Invest Saver works on a dollar-cost averaging approach and helps customers accumulate their investment steadily with no need to time the market.
- DBS’ robo-advisor digiPortfolio is a hybrid of human expertise powered by robo-technology, with a team of portfolio managers that carefully selects ETFs to create quality portfolios, monitors the market regularly and ensures alignment with DBS Chief Investment Officer’s (CIO) views.
- Consider investment recommendations from DBS CIO.
- Get investment ideas on DBS’ research platform Insights Direct, where you can access award-winning and in-depth analysis of more than 500 stocks across Singapore, Hong Kong, China, Indonesia, and Thailand.
- Follow Singapore Equity Picks, accessible through Insights Direct and one of DBS Group Research’s most-read products. It has generated a time-weighted rate of return of 14.51% in 2021 and has consistently outperform STI since its inception in July 2016.
5. Stress-test your financial plan
- Most financial plans assume an inflation rate of 2% - 3% when projecting future income flows to determine retirement adequacy. Plan for higher costs of living by assuming different inflation scenarios of 3%, 4% or 5% and work out how these different rates impact your future cash flows and retirement planning. The Map Your Money feature in the NAV Planner tool allows for different projections of inflation rates and investment yields, which is great for stress-testing your finances and identifying your gaps early for clarity.
6. Don’t forget about insurance!
- The Covid-19 pandemic has increased awareness that taking care of ourselves and attending to our health is more important than ever. It may be tempting to cancel or reduce your insurance coverage to lower monthly expenses, but the last thing you want to worry about in a health crisis/accident is how you can pay for your medical expenses.
- Going forward, healthcare and insurance spending will likely play a bigger role in our financial planning since inflation will increase healthcare costs as well. Do note that there will be changes to the use of MediSave and MediShield Life for cancer drugs and treatments from September 2022.
- As a guideline, we recommend our customers to have a suitable hospitalisation plan, a basic life cover of about 9-10x your annual income, as well as about 5x your annual income in critical illness cover.
Ready to start?
Speak to the Wealth Planning Manager today for a financial health check and how you can better plan your finances.
Alternatively, check out NAV Planner to analyse your real-time financial health. The best part is, it’s fuss-free – we automatically work out your money flows and provide money tips.
Disclaimers and Important Notice
This article is meant for information only and should not be relied upon as financial advice. Before making any decision to buy, sell or hold any investment or insurance product, you should seek advice from a financial adviser regarding its suitability.
All investments come with risks and you can lose money on your investment. Invest only if you understand and can monitor your investment. Diversify your investments and avoid investing a large portion of your money in a single product issuer.
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