Beating inflation: Sustainable financial planning needed amid high inflation, sluggish income growth and growing expenses
Singapore, 01 Aug 2022 - Amid the post-pandemic economic recovery and improving job market, growing inflation and ballooning expenses have outpaced wage growth, throwing a wrench into consumers’ financial plans, a DBS research study has found. Millennials (ages 26 to 41) and Boomers (ages 58 to 76), however, are in a better position to protect their finances from inflation – their investments grew faster than expenses over the past year. Gen X customers (ages 42 to 57), who are near their retirement age but saw investment growth lagging that of expenses, could boost their investments to shore up their finances and safeguard their nest egg.
Despite improvements in wages and employment prospects, the income of nearly half a million DBS/POSB customers lagged behind surging inflation, with some customers even experiencing a decline in real income after factoring in the effects of inflation. This was exacerbated by expenses, which grew two times faster than income over the past year. The lower-income group, those earning less than SGD 2,500 a month, have been harder-hit – their expenses grew almost six times faster than their income.
Lower-income group and Boomers witnessed high expense-to-income ratios of >90%, suggesting that these customers could have less bandwidth to stomach higher inflation rates in the future. Said Irvin Seah, Senior Economist, DBS Group Research: “From one regressive event to another, it seems like the odds are stacked against the financial well-being of Singaporeans. With inflationary pressures creeping up, slow wage growth and a growing propensity to “revenge-spend”, low-income earners are especially vulnerable to the ill-effects of the current economic situation. Having said that, we are also seeing a break in the clouds with the recent SGD 1.5 billion fiscal support to help low-income earners tide over this difficult period. Beyond that, market volatility is driving customers to safe havens like bonds, and investments have gone up across all segments although there is room for growth. Now, it is more crucial than ever to change our course towards sustainable financial planning, for it will help ensure that our finances can go the distance and win this race against inflation.”
These are some of the findings revealed by DBS’ latest NAV Financial Health Series research report based on DBS’ proprietary database of anonymised and aggregated data insights from a group of close to 1.2 million retail customers, alongside macro-economic data:
1. Income is not keeping up with inflation for 40% of DBS’ 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 consumer price index (CPI) inflation of 5.2% in first half of 2022, and DBS’ 2022 CPI forecast of 5.1%.
2. The lowest-income group witnessed the greatest lag in income growth
.
Customers earning less than SGD 2,500 a month saw income grow by only 2.5% between May 2021 and May 2022. Simply put, vulnerable segments of 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 SGD 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 income mobility effects are considered, 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.
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%).
7. Inflation affects everyone differently, depending on an individual’s expenditure pattern
.
The three key drivers of inflation in Singapore have been food, transportation, and housing and utilities, which together account for around 63% of the overall CPI basket.
8. The lowest-income group and Boomers are more vulnerable to high inflation, based on their lower wallet bandwidth
.
We observe that the lowest-income group (i.e., those earning less than SGD2,500 a month) 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, suggesting a lower bandwidth to stomach higher inflation.
9. Investments grew over the year.
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.
10. There are also signs of “flight to safety” amid the recent market volatility
.
Across all generations and income groups, DBS 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. DBS 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 assets under management or AUM), investing close to 3x the amount of a non-NAV Planner user.
12. 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.
A multi-pronged approach is required to effectively manage one’s exposure to inflation. While governments around the world are ramping up efforts to stem inflation through various policy means including fiscal support, more is needed from individuals to protect themselves and their finances.
“Inflation affects everyone differently, but consumers need to keep in mind that continued inflation will take a toll on wallets over the long run regardless of one’s current financial situation,” said Lorna Tan, Head of Financial Planning Literacy, DBS Bank. “As a key institution that banks most of Singapore, we are committed to supporting Singaporeans in their financial planning journey, to make it easier and more intuitive for them to grow their wealth and savings, especially to weather major economic events such as the pandemic and high inflation – and we’re seeing some of these efforts pay off. We have observed that, on average, DBS NAV Planner users across generations and income groups invest more than non-NAV Planner users, and they have more than three times the amount of AUM. In addition to being more judicious with spending, we should ensure that we are adequately insured and adopt a long-term, diversified investment strategy to preserve our purchasing power and achieve financial wellness.”
DBS/POSB customers can leverage DBS NAV Planner, the bank’s proprietary digital financial and retirement planning tool, to put together a customised budget with saving/spend targets. The AI-powered advisor helps identify and close insurance and investing gaps as well as project income flows, and customers can also plan for their property needs and consolidate their finances across various bank accounts via SGFinDex. This personalised communications and insights from the AI-powered advisor contributed to a four-fold increase in customers who were able to complete their investment journeys. Today, some 2.8 million customers have used the NAV Planner to date, with a majority between the ages of 21 and 50.
Customers can also tap on the bank’s investment and research experts to make well-informed investing decisions, and the latest includes
DBS Insights Direct
– a research platform where customers can access in-depth analysis, produced by the bank’s award-winning analysts, of more than 500 stocks across Singapore, Hong Kong, China, Indonesia, and Thailand. For more information, visit:
https://www.dbs.com/insightsdirect/home
. Join us on Telegram for daily updates at
t.me/dbsinsightsdirect
.
For the full report, please click here (
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