Singaporean facing retrenchment should beware making these common money mistakes.
A shock layoff happened at Singapore Press Holdings (SPH) last week, as 130 employees were retrenched. Many of these retrenchments happened on the same day, causing an understandable level of grief and distress. Should the same happen to you, here are some follow-up financial mistakes that tend to happen just after; make sure you avoid them.
1. Moving Too Fast To Liquidate Your Assets
Due to the shock, recently retrenched people often overreact. The first casualties tend to be assets that are easily liquidated.
Unit trusts are sold off (even at a loss), cash is pulled from fixed deposits (which sacrifices the accrued interest), and endowment policies are sold off before maturity (which can make you lose money). In extreme cases, some people even rush to downsize the home; they may even be willing to accept offers that are below valuation, as they perceive an immediate need for cash.
Avoid this kind of blind panic. Speak to a financial planner first – if you must sell off assets, it should be done in a systematic manner. For example, you might liquidate blue chip stocks to cover the first month of expenses, then move on to selling unit trusts the second month, then look at cashing out of savings bonds, and so forth.
If you rush to sell everything at one go, you could suffer huge losses, as you might sell an asset for a lower price than you bought it. If you happen to land a new job just one or two months later – and it turns out your savings would have sufficed after all – you could have badly damaged your retirement fund for nothing.
2. Blow What Little Savings You Have
Let’s say that, for whatever reason, you don’t have much savings when you’re retrenched. Don’t immediately decide “it’s all over”, and go on a binge and spend everything because it “doesn’t matter now anyway”.
It never helps to have less money. Your first response should be to preserve what you have. Remember that the more you’re forced to rely on credit, the more you’ll accumulate high-interest debts.
If you can’t pay off your debts while looking for a new job (see point 3 on this), then at the very least avoid accumulating new debt.
3. Waiting Too Long to Negotiate Loan Payments
Work out your monthly loan repayments, and how long you can keep servicing them (while still keeping healthy and fed). If you cannot service your loans for longer than the next month or two, contact your bank or a credit counselling service.
Many banks are willing to help you restructure your debts, if you’re prompt and give them early notice. For example, some banks can offer you a Debt Consolidation Plan (DCP) that combines your various debts into one, and lowers the overall interest rate.
Your credit score will also suffer less damage, if it reflects that you at least tried to repay the debt.
Never wait until the last minute! The longer you put off debt repayment, the more the interest will compound. By the time you find a new job, you might be buried under a mountain of debt that takes years to pay off.
4. Allowing Your Insurance to Lapse
You may decide that, given your lack of income, you can’t afford to keep your insurance. We beg to differ: given your lack of income, you can’t afford to not be insured.
The less money you have in savings, the more important it is to maintain your insurance. If you can’t make the premiums, quickly call your financial adviser and come up with a back-up plan.
Your adviser may be able to switch you to a cheaper plan (which is still better than no insurance), or in some cases even let you go on a premium holiday, where you stop paying premiums for a while. (Note: not all insurance policies have premium holidays.)
Whatever the case, never just allow your insurance to lapse. One medical emergency is all it takes to make your financial hardship permanent.
5. Rushing to Take a Reverse Mortgage/Asset-backed Loan
It can be tempting to take big loans against fully-paid assets that you own. If you own a paid-up private property, for instance, you might be tempted to borrow against it, as the loan has a low interest rate and can probably last you several years (a reverse mortgage lets you borrow up to 50 per cent of the value of your house).
Some people may also take loans against assets like gold, or even their stock portfolio (but these options are not open to everyone).
Before you take this step, check how long your savings will last. If you have enough to tide you over for three to six months, for example, chances are you can find a new income source before your savings run out. If it turns out you had enough all along, you could grow to regret your new debt (which might take a long time to repay, in the example of a reverse mortgage*).
Likewise, speak to a qualified wealth manager or financial adviser, about the size of the loan you should take. Just because you can borrow 50 per cent of your home value, doesn’t mean you should. Such a large debt is probably unnecessary.
If you can help it at all, try to put off loans till a month before your savings run out (this is the typical length of time it takes, for a reverse mortgage to be approved). Don’t jump the gun out of sheer panic.
*There are often steep prepayment penalties, should you try to repay the whole debt early. You will not escape losing money due to the interest rate.
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By Ryan Ong
Ryan has been writing about finance for the last 10 years. He also has his fingers in a lot of other pies, having written for publications such as Men’s Health, Her World, Esquire, and Yahoo! Finance.