From young, we are taught the importance of saving money for an emergency or to be able to purchase something, like an expensive toy.
After we grow up, we are taught that financial prudence means saving first before spending.
Now, that is great advise - at least that's what I thought - until recently.
The following is a true story.
It is the story about how a relative handles his money.
Let's call this relative Joe.
Chapter 1: Debt Discovery & Bailouts
Joe is the kind of guy who spends first and saves what is left.
That would be fine except he overspends on random things without keeping track of what he has bought, like a big Toyogo box to put the small ones he previously bought, or good luck crystals, or 4D and Toto.
Without a doubt, after several years of living like that, he maxed out several of his credit cards and accumulated a sizable amount of credit card debt.
Long story short, Joe was no longer able to keep up with his credit cards' minimum payments and reached out to his family for help.
His family came together and bailed him out.
But just like when the European Central Bank (ECB) bailed out the bankrupted European Union (EU) countries, the family too set restrictions, created debt repayment arrangements and cancelled all of his credit cards.
Of course, the family also emphasised the importance of having savings.
Lesson 1: As Warren Buffett said, "If you buy things you don't need, you will soon sell things you need."
So keep track of where you are spending your money.
Chapter 2: Turning For The Better
After the whole debt saga and education on the importance of savings, Joe seems to have changed.
He started accumulating savings, not buy things recklessly, and quit gambling.
He was repaying his debts to the family, and for a brief period, he seemed to have learned his lesson and was financially stable.
Or so it seems.
A couple of years later, Joe went to the family for help again.
He had gotten himself into the same mess he was in previously - he had maxed out his cards and once again accumulated a sizable amount of debt.
This time, it is for the same reasons and more.
Chapter 3: Easy Credit Card Access
Joe's family may have cancelled all his cards, but they forgot that it is not hard to re-apply for new credit cards.
That was what Joe did.
A period after the first debt saga ended, when Joe was no longer under tight supervision, he applied for several new credit cards again.
Needless to say, the cards were soon approved, and he started his spending spree again.
This was all done without the knowledge of the family.
Lesson 2: Just because you are eligible for a credit card or a loan, doesn't mean you must get it.
You can just say 'NO'!
Chapter 4: Hiding The New Toys
The family thought Joe had learnt his lesson and no longer bought random stuff.
The family got this conclusion from visiting Joe's house - they no longer saw random new things lying around the house.
Besides, everyone in the family thought Joe didn't have a credit card, and hence thought he would not be able to overspend his means even if he wanted to.
Little did they know, the random stuff still exists in his home.
Things like good luck crystals, Toyogo boxes, and new furniture (bed frame, mattress, etc.) although the old ones were still in good condition.
It wasn't because he no longer buys them, but because he hid them well and out of sight when the family visited him.
Lesson 3: If someone wants to hide something from you, they will do everything they can to hide it from you.
Chapter 5: The 'Best Parent' Award
Joe is a divorce with full custody of his 2 children.
They are still in contact with the children's mother.
Although both parents are friendly to each other on the surface, beneath it, both parties are battling it all out to be the best parent in their children's eye: bi-weekly restaurant dinner, monthly family day, or giving in to their children's wishes.
This is like democracy at its worse.
They are behaving like the Greek politicians who gave promises of big pension or welfare to their voters in exchange for their votes.
Joe and his ex-wife are the Greek politicians, and their 2 children are the voters.
The Greek politicians ended up bankrupting Greece while Joe and his ex-wife ended up emptying their savings or getting into debts.
And that is one of the new reason Joe got into trouble with debts again.
Lesson 4: Do things within your means. If you can't afford it, don't spend on it.
If your kids like you solely because you showered them with luxury items, then maybe you hadn't taught them the right values.
Recommended Read: Save in CPF or Invest in Nikko AM STI ETF?
Chapter 6: Save First, Spend What's Left
After the debt saga, Joe started saving up money to build his emergency fund.
He set aside money to save first, then spend what is left.
Which is all fine except this was carried out to an extreme.
Because Joe saves before spending, he runs out of money to pay for living expenses.
Because "savings should not be touched", Joe withdrew money from his credit card to pay his bills.
Let's say he earned $1,100, saved $100, and has a monthly expenditure of about $1,300.
Instead of cutting spending (which didn't happen even though he claimed he tried) or using that $100 savings to reduce the deficit, he proceeded to withdraw $300 cash from his credit card to finance his expenses.
Side Track:
Withdrawing cash from your credit card is one of the dumbest things you can do to get yourself financially ruin.
- There's a 6% admin fee for withdrawing the amount. AKA if you withdraw $1,000 from your credit card, the bank will charge you $1,060 for it. When you pay with your credit card, the bank charges a transaction fee on the merchant. When you withdraw cash, the bank charges YOU that transaction fee.
- Cash withdrawal interest rate is (3%) higher than the credit card's interest rate, even though they are both from the same card.
In short, Joe was basically borrowing from the bank at 24% interest so that he can have emergency savings stashed away earning 0.1% interest.
Based on the figures that we used in Joe's example, assuming he withdraws $300 every money to cover his expenses + the 6% cash withdrawal fee.
In the 1st month, Joe withdraw $300 and incurred $18 in withdrawal fee,
In the 2nd month, Joe would withdraw another $300, incurred another $18 in withdrawal fee, on top of the previous month's $318 that he has no money to pay.
Accumulated over 4 months, he would end up owing $1,272 in credit card bill, and that excludes late fees and interest charges.
Needless to say, by the time the family found out the second mountain of debt, it was all too late.
The family got Joe to empty his emergency savings to pay down his debt.
But by then, the debt has escalated to a mid-5-digit sum again, and that emergency savings could not even help much in reducing the debt load.
Lesson 5: Don't withdraw cash from your credit card. Pay your credit card bills on time and in full!
Lesson 6: Your credit card debt is an emergency. Use your emergency fund to pay it in full!
What else are you keeping your emergency funds for?
Chapter 7: Habits Are Hard To Change
You may be wondering. "maybe Joe is not earning enough, or has a lot of expenses".
Joe bought a new table because the previous table he had was too big for his house.
Joe recently wanted to upgrade his mobile phone to S20 (he is using S10 he got last year) although he only uses it for YouTube, WhatsApp, and Facebook.
And all these happened while he was still overspending every month and had accumulated a sizable credit card debt.
Joe earns a middle-income wage, the median salary in Singapore to be exact.
Hence this is not a "low-income" situation, but a spending habit problem.
Joe's habit: I'll find the money to pay it when the bill comes.
When the children's education bill comes, Joe will start searching for money.
If he can't find or earn it (which is usually the case), he'll use his credit card.
When Joe's unable to pay for the mortgage using his CPF (insufficient funds), he turns to his credit cards.
Lesson 7: As Warren Buffett said, "the chains of habit are too light to be felt until they are too heavy to be broken".
Habits once formed are hard to break or change.
Paying using credit cards for anything and everything is a habit.
It is an okay habit to have until another one comes along: not paying the credit card bills in full.
That's when the troubles come.
Chapter 8: European Union To The Rescue
Well, not the actual EU, but close enough.
Remember in Chapter 5, where we said Joe was acting like Greek politicians?
EU bailed out Greece when they got into a financial crisis.
EU lent money to Greece several times over the decade from 2008 to 2018.
Similarly, the family lent money to Joe to bail him out of the new debts he had created.
FYI: the 2nd debt saga is a story from a couple of years back.
This year (2020), Joe had recently approached his family again to ask for another round of mid-five-figure bailout funds.
The reason is the same as before: credit card debts incurred from overspending.
When the family condones such acts, it is sending a message to Joe that it is okay to overspend and ask for another round of bailouts continuously.
Just like how the EU would not want Greece to fail because it would look bad on the whole Eurozone and create a ripple effect in the European economy, hanging Joe out to dry would probably not make subsequent CNY reunion a pleasant gathering.
However, unlimited financial aid by the family is not the appropriate solution to Joe's problem.
Instead, it would only increase the burden on the family's overall finances.
Chapter 9: Conclusion
Don't be confused.
Joe's an exception, not the norm.
Most people I know spend first and save what's left, and that's fine because at least they are not going into deficit or debt.
But if you know a Joe in your life, share with them this article.
Let them know that they need help - not the bailout kind of help.
They need to seek professional help, maybe a psychiatrist.
A financial advisor might give them the instructions on how to get their financial life in order, but if they don't follow it, nothing is going to improve.
If you have trouble kicking the gambling habit, we don't call it a financial problem or get a financial advisor to come in and help you.
Similarly, if your spending problem persists despite already gone through financial education, then what you need is not financial aid or financial advisor.
What you need is to visit a doctor, a psychiatrist.
And this is a story of how saving money doesn't work.
Hey You!
If you have a story about your or your relative's financial journey that you want to share, let us know in the comments below or email us at investmentstab@gmail.com.
Recommended Read: The 4% Shortfall In Your CPF Retirement Fund
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