What Singapore’s COVID-19 Response Taught Us About Savings and Reserves

 "It never rains but it pours"

This idiom perfectly describes the COVID-19 situation which hit the world badly at the beginning of the year. Fast forward the months, and we are now in December, a year from the initial outbreak of the novel coronavirus.

In March 2020, the World Health Organisation announced COVID-19 as a pandemic, leading to many countries locking down their economies, barring their citizens from leaving their homes other than for essential services, and grinding international travel to a halt.


Singapore, the tiny city-state, was not spared. With a tiny domestic market and an economy that is highly dependent on import and export, Singapore’s Ministry of Trade and Industry (MTI) projects that the economy will be shrinking between 6% to 6.5% this year.


Drawing from Past Reserves

It is reasonable to say that the economic impact would probably have been much worse, if not for the 4 sets of stimulus packages (“Budgets”) to help businesses and individuals who have suffered from the economic fallout. The 4 Budgets totalled nearly $100 billion, which is almost 20% of the country’s GDP.


This necessitated two drawdowns from the national reserves, totalling $52 billion, with the consent of President Halimah Yacob.


The only other time that the national reserves have been tapped on was during the 2008-2009 global financial crisis when $4.9 billion was approved by then-President S R Nathan.


It is by no means a simple feat for a country with no natural resources, little land, and a population of about 5 million, to be able to muster up such large quantities of cash to fend off the worst pandemic in modern history.


This is only possible with the frugality, discipline, and long-term thinking of the current and past governments. And we should learn from this example to better strengthen our personal financial security and resilience.


Focus on Building Your Reserves

We can similarly build our reserves, to create for ourselves a safety net that can save our lives in times of crisis.


That would require you to focus on the objective and prioritise saving above spending. It requires discipline and hard work, but trust me, it is well worth it.


Firstly, have in mind what proportion of your income you would want to dedicate to setting aside for your reserves. I usually recommend 10% to 20% as a start, but you can do more if you can. 


The reserves should be kept in a bank account that is separate from your usual checking/spending accounts, in the same way that Singapore’s reserves are tucked safely away in MAS, GIC and Temasek.


Your reserves are never to be spent, not even for your house renovation or kids’ education. The purpose of the reserves is to be there for rainy days, and that itself is its sacred purpose. Think of your reserves as a cookie jar. If you keep reaching into the cookie jar because you cannot control your temptations, very soon, there will be no cookie left in the jar.


An important thing to take note is not to be overly exuberant and set aside more than what you can afford. The risk of this over-exuberance is that you may find yourself having to draw down from your reserves prematurely when you are short of cash. Prematurely drawing down of your reserves sends a subconscious message to your brain that it’s okay to dip into your rainy day fund, and over time it becomes habitual and sabotages the success of your wealth accumulation.


Investing Your Reserves for Growth

Your reserves should be invested into safe investments that can beat inflation, and not into highly risky ones that can potentially wipe out a big chunk of your safety net. 

A good rate of return would be 3-5%, whereby it can outpace inflation, yet are safe and stable enough to preserve the value of your reserves. These are usually bonds-based assets (such as bond funds, endowment policies with withdrawal options), well-diversified investment funds, or a basket of high-quality blue-chip shares.

Avoid penny stocks (small, speculative company shares), derivatives (such as options, forex trading, warrants), and illiquid assets (such as property, businesses, collectables). While these investments may yield high potential returns, they do not fit into the objective of building a reserve fund that is stable and accessible.

Forget about trading (short-term buying and selling) investments using your reserve fund. It is not meant for this purpose. Instead, invest in long-term and high-quality assets that can stand the test of time.

Any profits or dividends should be put back into your reserves account. This allows for it to be reinvested, and in turn, your assets will be able to grow at a faster rate by compounding.


Bracing Yourself for an Unpredictable Future

Luck is often defined as “preparation meets opportunity”. By this very definition, “bad luck” happens when an undesirable situation happens, and one is not prepared to handle it. 


I do not believe that we can absolutely avoid such undesirable situations from happening in our lives. We are bound to experience a few other financial crises, a family member falling sick, or perhaps losing our jobs and incomes. 


But I believe we can prepare ourselves for the day such a misfortune knocks at our door. Be it the accumulation of our reserves, purchase of adequate insurance, or upgrading our skills and knowledge to stay relevant in the workplace, the power and control to prepare for it is in your hands right now.


Do not blame misfortunes on the economy, situations, or people. We can only pin the blame on ourselves if we did not save up or take action when we had the opportunity to do so. Make hay while the sun shines. Live life with no regrets. 


Start building your reserves like how the tiny red dot nation has done so, and you can rest assured that come what may, you will be prepared to take it on.


By Cai Junhao, ChFC/S, AEPP, on 3 December 2020

Facts used in the writing of this article were sourced from World Health Organisation, Ministry of Trade and Industry, Monetary Authority of Singapore, Ministry of Finance, The Straits Times. The author has taken all reasonable effort to ensure the accuracy of the data presented.