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Demystifying Financial Literacy in Singapore: How to be financially smart amidst rising prices
BY DBS, 4 JAN 2024
Learn what it means to be financially literate and pick up essential financial concepts for a secure future.
What is Financial Literacy?
Financial literacy refers to an individual’s ability to make informed financial decisions to manage their day-to-day and future finances. This means tracking your monthly spending, creating a budget, setting aside emergency funds, saving for retirement, and investing to grow your wealth.
Financial literacy is all the more crucial as unexpected global events or accidents can impact one’s living expenses and drain their savings quickly.
Take the impact of the Covid-19 pandemic, for example. The global economy was slow to recover from the disruption of supply chains. Coupled with tumultuous geopolitical events, many are feeling the pinch from rising cost of food and energy.
Being equipped with financial literacy skills enables an individual to manage their money responsibly to weather uncertain economic conditions while avoiding high levels of debt that may lead to bankruptcy.
Key Components of Financial Literacy
There are four key factors to determine financially literacy, according to Monetary Authority of Singapore (MAS):
- How are people handling basic money management such as budgeting, saving, spending, managing the interest rates on credits cards and personal loans?
- What active plans do they have to provide for their future financial or retirement needs?
- What level of understanding do they have of the risks and implications of taking up common financial products such as insurance policies, loans and other investment products?
- What steps have they taken to understand financial concepts (i.e. what they are investing in) and monitor the performances of their investments regularly?
One of the key aspects of financial literacy is financial planning, and understanding the concept of compound interest and the time value of money. As compound interest requires a set amount of time to grow your principal amount, it’s important to plan ahead.
Lorna Tan, Head of Financial Planning at DBS Bank believes that one should take actionable steps to achieve one’s short-, medium-, and long-term financial goals.
The Singaporean government and industry associations including banks have developed an easy-to-use Basic Financial Planning Guide which includes the following summarised tips:
Set aside at least three to six months’ worth of expenses for your emergency fund.
Spend at most 15% of your income on insurance protection. The general rule of thumb is to get insurance protection coverage for Critical Illness and Death & Total Permanent Disability (TPD):
- 4x your annual income for Critical Illness
- 9x your annual income for Death & TPD
Familiarise yourself with national schemes such as MediShield Life for large healthcare bills and CareShield Life/ElderShield for long-term care in case of severe disabilities
Invest at least 10% of your salary for retirement and other financial goals.
While the guide is the first step in setting up your financial plan, it may not cater to everyone’s needs, circumstances, and preferences. For instance, the level of adequate emergency funds may differ from person to person based on the frequency or predictability of their income.
Those who enjoy steady paycheques should put aside about three to six months of emergency cash while freelancers for example, with unpredictable income, may require 12 months or more to account for lull periods in their income.
To customise your financial plan based on financial objectives, DBS strongly encourages customers to map out their financial journey on DBS digibank and/or with a Wealth Planning Manager.
The DBS NAV Planner feature on digibank is a one-stop digital tool that utilises customer’s saving and spending patterns, as well as SGFinDex data from insurers and governmental websites, to present a concise picture of their current financial situation.
The information, pulled onto the platform with customer’s consent, enables customers to project their cashflow, visualise their savings, and take concrete actions to plan for rainy days while growing their retirement nest egg.
Benefits of Financial Literacy
A 2023 survey conducted by Smart Wealth and 2020 study conducted by Singapore Management University (SMU) found that two in three respondents who are financially literate are better able to manage debt, avoid financial fraud, and remain financially secure during times of inflation or economic downturns by diversifying their investment portfolio.
In Singapore, the government introduced the Central Provident Fund, a social security savings scheme to ensure Singaporeans and Singapore Permanent Residents save for their retirement. All workers must contribute about 20% of their monthly wages, and their employers 17% to the CPF board.
While there is a robust retirement system in Singapore, a Cambridge University Press study and National University of Singapore survey commissioned by the MoneySense Council reported that approximately only four in 10 respondents surveyed are financially literate. A knowledge gap such as risk diversification and simple and compound interest can be further improved, especially among women and low-income groups.
MoneySense has workshops and educational videos to provide tips on retirement planning and managing one’s money during inflation.
Enhancing Financial Literacy in Singapore
In August 2023, DBS announced that it will commit up to SGD 1 billion over the next decade to improve the livelihoods of the low-income and underprivileged, and foster a more inclusive society.
Among the programmes that will support the underserved include equipping them with important life skills such as digital and financial literacy. The bank’s employees will also commit over 1.5 million volunteer hours to give back to society.
Since 2014, employee volunteers – known as DBS People of Purpose – have been running financial literacy workshops to bolster financial literacy among vulnerable groups. One of such workshops is the POSB x APSN – Save Smart with Smiley organised for students with mild intellectual disabilities at APSN Schools.
These workshops aim to start the students on financial education as young as possible and bolster their confidence in money management.
DBS Wealth Planning Manager Martin Kwok, whose day-to-day job involves advising customers on suitable financial products to meet their short- and long-term financial goals, taught Raiyan at APSN Chaoyang how to budget and save his pocket money, use cashless payments such as DBS PayLah!, and spot online scams.
Nine-year-old Raiyan said:
“My favourite lesson was understanding how to spot online scams and setting a strong password using symbols, letters, and numbers. I also learnt the importance of donating some of my savings to those in need.”
Learn more about DBS’ efforts to equip the underserved communities with digital and financial literacy here.