5 Financial Mistakes To Avoid In 2021, Especially If We're Already Experiencing Financial pressure

It's a well-known fact that we tend to make sub-optimal decisions if we are under stress.

Compared to recent years, 2021 has been an exceptionally difficult year. Whether it's being laid off from a job, can not cope with our work-from-home routine or experiencing cabin fever because of the circuit-breaker, it wouldn't be an overstatement to state that 2021 hasn't gone according to plan.

Some of us may also be experiencing financial stress within our lives. According to the Ministry of Manpower (MOM), there has been 11,350 retrenchments in the first half of 2021, having a further 81,720 employees being put on short work-week or temporary layoffs. Aside from the retrenchment, getting a job has also be difficult, with MOM estimating there are only 0.57 jobs for every unemployed person as of June 2021.

A little financial pressure could be a good thing whether it jolts us into taking actions that we must. For instance, when we feel cash is a little tight and that motivates us to try harder to locate a job, this is not bad. However, when the stress leads us to make bad financial decisions, we need to be skeptical about it.

Making bad financial decisions because you are stressed out is not a trivial matter. When we make an ill-advised decision to eat huge fast-food supper at midnight, the likely consequence is that we may possess a bad stomachache the following day. With financial decisions, the effect can have long-lasting consequences.

Here are 5 financial mistakes that we wish to avoid making in 2021, even when we undergo financial pressure.

#1 Attempting to cut your monthly expenses by reduction of your essential insurance coverage

Even during a recession, our insurance policy remains the same. The weaker economy doesn't prevent us getting sick or through an unexpected accident. When we have bought insurance policy to safeguard ourselves and also the people around us, we need to retain this coverage even during bad times, not only during good times.

This is the reason why we ought to make sure that our insurance premiums are affordable before acquiring the policy. We need to treat our insurance coverage as a necessary expense during both good and bad times. For example, if we have children, we should buy a minimum of some term life coverage for ourselves. Such coverage will make sure that our children will continue to be financially protected even if we are no longer around to provide for them.

We may also consider restructuring our insurance policies so that we still receive similar coverage at a lower premium. Remember, insurance policies are a necessary expense rather than a good investment. We ought to 1) focus on the coverage that we need and 2) be cost-efficient in the manner we get ourselves and our loved ones protected. There is no need to pay a lot more than what we have to.

In a recent My Money webinar 2021 jointly organised by MoneySense, the Association of Banks in Singapore, and also the Securities Investors Association Singapore, MoneyOwl CEO Chuin Ting Weber spoke briefly about this topic. She also stressed that if we plan to relook our coverage, we should speak to a trusted financial adviser as restructuring our insurance plans isn't so simple, and that we have to be mindful about our insurability before changing any policies. You can view her presentation here. (19:00 onwards)

Lesson one: Prioritise both your insurance needs as well as the affordability of the insurance plans. You need to ensure that you can afford the premiums during both good and bad times, instead of to reduce your insurance coverage when you can no longer afford it.

#2 Borrowing more to cover our loans

Unfortunately, some people might have found ourselves out of employment or needing to take a pay cut this season. In this instance, we may struggle to make the monthly repayment required on the loans we've taken.

We should make sure to avoid making the mistake of taking another loan – like a personal loan – to ensure that we can result in the monthly repayment on our first loan. Although this might provide us with short-term respite, the result is that it makes a larger problem for all of us over time, since we now need to service two loans rather than one.

We have to solve our problems at its root. If we have over-extended ourselves financially by purchasing a car we can't afford, we should solve the issue directly by selling the car, require another loan to cover it. Alternatively, as shared by Lorna Tan, Head Of monetary Planning Literacy at DBS (40:06 – 1:06:08), there are some temporary relief measures for housing, renovation and student loans that borrowers can consider trying to get to help them tide through. Homeowners can also consider refinancing or repricing their house loans to lower their rates of interest if they are from their lock-in period. Having said that, we need to be familiar with the additional interest costs that people may incur when we defer our loan repayments, or any other costs which we might incur when we reprice or refinance our loans.

In the My Money webinar – Managing Your hard earned money, Credit Counselling Singapore General Manager Tan Huey Min shared that one from the 'Don'ts' of managing your finances during this time period is to be borrowing to pay for other loans.

If you're having issues managing the money you owe or want to help another person who's having this problem, do discover the shocking truth (1:06:30 onwards) to obtain more advice on what you can do during this period to manage any debt.

Lesson two: Don't take a loan to pay off other loans. It just results in a vicious circle instead of to resolve your problem at its root.

#3 Using instalment plans or credit cards to pay for things we no longer can afford

Many of us are used to a certain standard of living. This could include dining out at restaurants regularly with the family, happening overseas trips or staycations or taking taxis and private-hire cars to visit around Singapore.

When we are working, time with your family is likely a commodity that we treasure. Going for a cab in order to save time could be money well spent. Likewise, through an enjoyable Friday night dinner with your family might be money (and time) wisely spent. These expenses could be an integral part of our lifestyle.

However, as faced with a substantial change in our financial circumstances, we have to adapt quickly. For example, when we have forfeit our jobs, insisting on our weekly Friday family dinners at a restaurant could be something which we should put on hold. Likewise, discretionary expenses for example taking taxis regularly or booking staycations should stop for the time being.

However, the simplicity of access that people have to credit these days will make it tough for all of us to evolve quickly. Even when we can no more comfortably afford a few of these discretionary expenses, we still have the choice to cover them via a credit card or an interest-free instalment plan first.

By itself, these financing solutions are good – as it gives us use of credit and additional flexibility to pay for our purchases. However, they might exacerbate the problem by leading us to continue spending on some of these things whenever we can't afford it.

If you are facing financial stress, steer clear of the temptation of purchasing something totally new utilizing an instalment plan. That is because if you are unable to repay the borrowed money in full and on time, you incur hefty interest charges, which will only help make your financial situation worse.

Lesson three: Not pay on credit or using instalment plans if you're already having income problems.

#4 Taking On Opportunities That Sounds Too Best to Be True

When we face financial challenges, it's obvious that we would actively be on the lookout for methods to our problems. We may be more receptive to job offers, investment opportunities, or deals that appear too good to pass on.

Unfortunately for us, those people who are looking to scam us in our hard-earned savings also know this and will design elaborate and appealing scams. This may be in the form of an investment opportunity, an e-commerce deal that sounds too best to be true, or even a 'job opportunity' that 'requires you to definitely receive funds and to transfer funds to others' (i.e. a money mule scam).

There are many different kinds of scams in Singapore. ScamAlert, a website through the National Crime Prevention Council (NCPC) has a designated page listing down probably the most common kinds of scams in Singapore. You can also watch this My Money webinar – Staying Digitally Safe, when Carolyn Misir, principal psychologist in the operations and forensic branch of the Police Psychological Services Division of the Singapore Police Force shared some of the psychological factors why people fall for scams (50:00 onwards).

Even once we seek opportunities during this time period, we have to be vigilant from the kind of scams that may be going on in Singapore. Doing so allows us to better protect ourselves and our family members from falling victim to these scams.

Lesson four: Be skeptical when a chance looks too best to be true.

#5 Being too greedy or fearful with regards to investing

Emotions can mislead us. This is particularly true when it comes to investments. During a bull run when markets are soaring, we all want to invest whenever possible because of the anxiety about really missing out (FOMO). During a bear market when the stock market crash, people end up waiting on the sidelines, afraid to invest as they are worried that their investment portfolio will decline. Neither action will let us as an investor.

As shared by Vasu Menon, Executive Director, Investment Strategy at OCBC Bank's Wealth Management unit during the – My Money webinar 2021: Managing Your Investments, 2021 has been an extremely volatile year for that markets.

The world's economy is anticipated to shrink by about 4.9% in 2021, which is much worse than the 2007/2008 global financial trouble when it shrunk by 0.1%. Economic data all over the world is showing dismal results. From 24 February to 23 March 2021, major indices like the S&P 500 took an enormous beating. Inside a 30-day period, the S&P 500 declined by about 30%. Many investors were rightly shaken, and some may have quickly exited the marketplace during the downturn.

The most unexpected thing occurred thereafter. After a disastrous Feb/Mar 2021 period, markets rallied, with indices such as the S&P 500 breaking pre-COVID-19 highs. According to Vasu, the marketplace rally could be attributed to three factors – 1) Hope – that the vaccine might be found soon which the economy will reopen, 2) Fear – for investors who're worried that they'll miss out on the rally when they don't invest now and 3) Liquidity – due to record low interest rates and quantitative easing from the Fed.

No one could have predicted how quickly the markets recovered. If we are scared of investing when the market crash and are now rushing enter into once the markets are peaking (again), only then do we risk letting our emotions rule our investment decisions, which isn't ideal within the long-term.

To catch the full presentation by Vasu Menon, you can view it here (7:45 to 30:45).

Lesson five: Market movements are unpredictable. As such, avoid timing the marketplace and concentrate on long-term investing instead

You can watch the 3 My Money 2021 webinars by clicking on the links below.

Managing your money, https://www.facebook.com/MoneySense/videos/219507186170026

Managing your investments, https://www.facebook.com/MoneySense/videos/1270757509958591

Staying digitally safe, https://www.facebook.com/MoneySense/videos/809416446265911