Earlier this month, I made a post entitled “It’s not how much you earn but how much you spend that matters”.
The case in point compared 2 people – one who earned $5,000 and the other $10,000. Their financial health were compared against a set of measures eg. Liquidity, ratio of savings to income, debt to income, etc.
It turns out the one earning $10,000 was in a worst-off position namely because he was paying a relatively high amount on interest that will not contribute to long-term asset enhancement. This included eg. Interest paid for a loan to own a car – which was a depreciating asset, etc. The scenario is a very real one. Those earning higher income tend to spend more and leverage more. Unless this leverage is directed towards assets that will result in higher asset values in the long run, such spending is simply not wise.
During this Covid-19 pandemic, many have realised the importance of having emergency funds. This is relevant not just at the individual but national level.
Singapore drew down almost $100B of its national reserves accumulated during good economic times to provide for its people and create jobs. If there was no reserves, the country would have had to borrow and end up paying interests forward, increasing the burden of future generations. The same is true at the individual level – we should avoid a situation where we have to borrow in order to repay our debts.
The articles featured in this post provide guidance on how we should manage our debt and Ensure we have sufficient savings for rainy days