7 Money Moves Singaporeans Can Make To Manage Inflation

With overall inflationary pressures remaining elevated and core inflation expected to rise above 4 per cent in the near term, the government is taking steps to manage the impact. Here are 7 things we think every Singaporean can work on to cushion their own inflation.

In its latest Monetary Policy Statement, the Monetary Authority of Singapore (MAS) revised upwards its expectation for inflation to range between 3% to 4% this year, up from its previous estimate of between 2.5% to 3.5%. 

As you’re probably aware, inflation makes everything more expensive. And while that is a normal feature of the modern economy, an inflation rate that is too high can cause serious problems, including crashing the economy. 

In this article, we will be taking a look at the reasons behind the latest rise in inflation, and discuss some money moves you can make to help moderate its effect. 

Understanding inflation

At the risk of oversimplifying things, inflation occurs when demand outstrips supply. This creates a scenario where there is more money chasing less goods, and customers compete with each other to get goods they need. 

This competition causes prices to go up – aka inflation – and when prices rise too fast over a prolonged period, that’s not good for the economy. 

In order to bring inflation back down, you must restore equilibrium between supply and demand by removing liquidity from the market. That’s to say, by reducing how much money is flowing around in the economy. 

Central banks accomplish this by raising interest rates, which makes the cost of borrowing more expensive. Increased interest rates make corporations and consumers cut back on spending, which manifests as reduced demand. 

As demand falls, the balance supply-demand balance is restored, which allows prices to come back down to their natural levels, slowing down inflation once again. 

Inflation is not all bad, you need at least a little inflation to drive the economy forward. Most central banks aim to maintain an inflation rate of around 2% per year. 

More on this topic:

8 Lifestyle Changes You Can Make to Better Cope With Inflation in Singapore 2022

9 Ways to Hedge Against Inflation with Investing

7 Ways to Beat Inflation and Safeguard Your Money

What’s behind the rise of inflation in 2022?

This speech by Managing Director of the MAS, Ravi Menon, does a great job providing a detailed blow-by-blow explanation of the current inflationary troubles we are facing. 

But to sum up, why we are seeing inflation (not just in Singapore, but all over the world) is because of three main reasons: pandemic-induced supply chain issues, increased consumer demand on the back of government aid, and the increase in commodity prices due to the Russian invasion of Ukraine. 

Now, because of this unholy trifecta (which are themselves driven by other issues), economies across the world are straining under mounting inflation, and sorting it all out will require a deft touch and nerves of steel. 

How can Singaporeans deal with inflation?

What inflation means for the ordinary Singaporean is as simple as it is insidious. The cost of living goes up, our purchasing power goes down, and there’s less money leftover to spend on bubble tea after paying the bills.

This means that during times of high inflation, the goal is to make our money stretch further. To that end, here are some tips to offset the negative effects of high inflation. 

1. Cut out unnecessary expenses

Go through your list of expenses, subscriptions and bills, and sort them into two piles – essential and non-essential. Get rid of everything in the second pile; you can always resubscribe or purchase them again when things improve. 

Don’t stop there. For your essential expenses, go through them and see if you can find a way to reduce them. Maybe you could switch to a cheaper mobile plan, or convert to a shared or family plan for streaming services like Netflix.  

2. Start cooking more (or go get your own takeout)

We get it, food delivery is a godsend on days when you just cannot, but the convenience and instant gratification is exactly what gets you hooked. And, that habit is costing you more than you’d think; there’s a surcharge on your food, on top of the delivery fee.

The solution is to give up a little convenience and comfort in exchange for some savings – you’d be surprised at how much it can add up to at the end of the month. Start cooking to save on meals, or cook more to take advantage of economies of scale. 

At the very least, start picking dinner up on the way home again, ya know, like how you used to, before the pandemic?

3. Lock in your mortgage rates

Remember how central banks raise interest rates to bring inflation down? Well, this causes the interest on your mortgage to go up, which means higher monthly payments. 

If your mortgage is from a bank, and you’re on a floating rate that goes up and down in tandem with monetary policy changes, you should consider switching to a fixed rate mortgage. This will allow you to lock in the current mortgage rates, preventing any further increase in your mortgage payments. 

Because fixed rates are slightly higher than floating rates, understand that this is something close to a gamble, as there’s no guarantee that floating mortgage rates will rise in the near term. Also, there’s a good chance that the banks have already adjusted their mortgage packages to match the expected increase. 

However, fixed rate mortgages aren't forever – you can refinance after the fixed period is over, which can range from 1 to 5 years. Additionally, fixed rates mortgages provide certainty in your cash flow, which some might find preferable. 

4. Lower the interest on your debt

Besides mortgages, credit cards and credit lines have floating interest rates too. As such, MAS raising interest rates can trickle down to cause higher interest charges on your outstanding debt. 

And besides, with everything getting more expensive, this means you may need to tap on your credit card more than usual, making it even more important to get your debt under control. 

The key is to lower the interest on your revolving debt. Try using a personal loan to pay off your credit card debt, and then focus on paying off your loan steadily. 

You can also use a 0% balance transfer, but you’ll have a shorter timeframe to pay off your balance transfer. 

As a last resort, convert your outstanding credit card balance into fixed instalment payments. This will, at least, shield you from further interest charges. 

5. Make your investments work harder

Inflation erodes your purchasing power by making everything else cost more. For instance, a S$3 plate of chicken rice will cost $4.45 in five years, if the expected doubling in food inflation in the second half of 2022 continues unabated. 

As such, dealing with inflation over the long term is all about making your money grow at a faster rate. So, if inflation remains at 4% every year, your investments will need to provide an annual return not less than 4% – just to preserve your spending power. 

As such, consider reducing your holdings in lower-return investments in favour of the ones that outstrip inflation. Real estate investment funds (REITs) can be a viable option, as they provide steady returns and are relatively less volatile. 

This goes double for any spare cash you happen to be sitting on; by leaving it in the bank, you’re guaranteeing the decay of your net worth at the prevailing rate of inflation. 

6. Increase your CPF contributions

On a related note, increasing your CPF contributions can also be a viable strategy to stave off the ill effects of inflation. 

This is because CPF interest rates are still high enough to be above the expected inflation rate of 3% to 4%, which will help preserve your spending power.

When considering this move, bear in mind that the high inflation rates are an anomaly, which means it will come down sooner or later. 

Hence, be careful not to over-commit and contribute too much of your funds, as CPF contributions are a one-way street, and you won’t be allowed to withdraw your funds. 

7. Increase your income

Besides cutting back on expenses, and making your money grow at a faster rate, another thing you can do is to increase your income. With more money coming in, you’ll be better able to cope with price increases.

This means starting up a side hustle, picking up gig economy jobs like private-hire, or renting out a spare room. 

You can also switch to a higher-paying job, but be aware that high inflation can lead to economic contraction, which can inflict instability on the job market. As such, you should consider any such moves carefully. When you do get a higher income and have stashed some emergency savings, the next step is to start investing for your long-term financial needs.

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