Standby Money - Get It While You Can

In my earlier post, I wrote about the need to have emergency cash reserves. If you don't already have them, here's a quick way to build them up. From the TODAY newspaper:

Income checks: Onus on banks or borrowers?
Issue arises as more lose jobs, fall below salary threshold
Tuesday • March 10, 2009
Neo Chai Chin

A “WEIRD” conversation public relations consultant Lim Wee Ling had with a bank telemarketer a month ago went like this: “Ma’am, do you need a credit line?”

“No.”

“But you could always do with another credit line. It’s possible that you could lose your job really quickly.”

Ms Lim, 31, was puzzled. “If I’m going to lose my job, all the more they shouldn’t be asking me to take credit,” she told Today.

In general, it is of course a bad idea to live on credit. In fact, I always think that anyone who actually pays interest on his credit cards must be either stupid or desperate.

Personal credit lines are a little different. Consider the fact that we are all now facing a prolonged economic crisis. You might have a job, but who knows whether you'll have one in six months' time, or a year's time. If you have plenty of emergency cash reserves, then you might not be that worried. But if you don't ....

While you still do have a job, you can get a personal credit line. When you don't have job, you won't be able to do so. So while you still have a job, perhaps it could be a good idea to apply for personal credit lines.

You then keep them on standby. As long as you don't use them, you won't have to pay any interest. But you keep them on standby, just in case someday in the future, touch wood, you do need to use them. (And I mean use them for essentials, not items like a new flat-screen TV).

In the not-so-distant past, a bank would normally grant to an individual a personal credit line equivalent to about twice the person's monthly salary. Under the new MAS regulations, a bank will be allowed to extend the person up to 4 times his monthly salary (if his annual income is at least $30,000).

So now, if you go apply for personal credit lines from three or four banks (eg DBS, OCBC, UOB and Standard Chartered), you could have an aggregate amount of credit lines easily exceeding your entire annual income.

Another consumer, Mr Lai Siew Kuan, got a call last week from a telemarketer, who told the 35-year-old property agent he could apply for a credit card even with a yearly income of $24,000 — that’s $6,000 below the qualifying income stipulated by the Monetary Authority of Singapore (MAS), for those aged 55 or younger.

Even as more Singaporeans fall victim to pay cuts or job losses, banks were recently reminded to periodically check the incomes of their credit cardholders. But how strict will banks actually get?

Last month, the MAS implemented revised guidelines on unsecured credit. One industry query it addressed was: What should happen with a credit cardholder whose annual income has fallen below the $30,000 threshold?

While such a customer may keep his existing cards, the MAS said, the bank must adjust the overall credit limit to twice his latest monthly income — and not grant any more credit until the customer’s outstanding sum falls below this new cap.

That's what the MAS said, in response to an industry query.

However, the actual regulations don't place any significant duty on banks to monitor on an ongoing basis the individual's employment status or monthly salary. In other words, at the time you apply for a credit line, the bank will ask you for your income statements.

Thereafter, the bank generally leaves you alone. Even if you lose your job the following month or your salary is cut, the bank generally wouldn't know and therefore your personal line of credit therefore still remains intact.

As a practical matter, it is not feasible for a bank to monitor its retail customers that closely. There are just too many retail customers.

But, judging from banks’ responses to Today’s queries, credit cardholders need not expect a sudden slew of letters or phone calls from their banks asking for proof of their latest income.

OCBC Bank said the typical practice is to conduct checks “at selected points in time, such as at the point of application as part of the process in providing a new card”, said Ms Lynn Gaspar, its head of lifestyle credit.

Association of Banks in Singapore director, Mrs Ong Ai Boon, said periodic income reviews on customers are done to “better assess their credit needs”. Income documents are required when applying for a new credit card, an additional card, or an increase in credit limit.

Standard Chartered and OCBC both told Today they had “robust” risk assessment and credit processes in place to lend responsibly. OCBC and United Overseas Bank also encouraged customers who experience difficulty with repayments to approach them, so as to explore options on a “case by case basis”.

I have two personal lines of credit. One is from DBS and the other is from RBS (formerly ABN AMRO). I never actually applied for them. They came automatically with my credit cards from these two banks. That was years ago.

And I've never used these personal credit lines. In the past, I made some attempts to cancel them, but DBS and RBS both waived the annual fees and said: "Please, please keep the lines. They're free, after all."

Oh well. Thanks then.

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Rules of Thumb .... And How To Have Better Thumbs

Here's some conventional wisdom from the world of personal financial planning. One of your early goals should be to build emergency reserves worth about six times your average monthly expenses. For example, if you usually spend about $3,000 per month, then you aim to build emergency reserves of about $18,000. This amount should be held in cash, not stocks or bonds or something else.

The idea is that if a person suddenly loses his job, he will usually succeed in finding a new one within six months. Thus if his emergency reserves are all nice and ready, then it can adequately sustain and support his usual lifestyle until he finds another job. The reserves should be in cash, because that's the safest, most liquid asset.

Two assumptions here. Firstly, that six months is enough time to find the new job. In more-normal times, this may sound reasonable. But current times are proving to be somewhat extraordinary. So quite arguably, the "six times" figure should be revised upwards, say, to "nine times".

The second assumption is that if you lose your job, you will largely continue to live the way you lived before, and therefore incur roughly the same amount of monthly expenses. In practice, this assumption could turn out to be true in many cases. Why?

Because when a person suddenly loses his job, he may not adapt quickly to the changed circumstances. He may promptly cut back on some smaller, more easily cuttable expenses (for example, eating out less often). However, there will inevitably be psychological resistance to the bigger lifestyle changes (eg giving up the car, or the maid).

Some of this psychological resistance will arise from the person's hope that perhaps he'll find a new job really quickly (eg maybe tomorrow, or next week), and therefore he doesn't really need to make any major lifestyle changes. The hope isn't necessarily unjustifiable or irrational. But it's important to have a Plan B ready, just so you're not unexpectedly caught with your pants down.

The way I see it, the trick to dealing with the psychological resistance is that even when you still have a job, you should start becoming very clear on what you've been spending it on. Then you'll know exactly what you need to cut, if it later turns out that you really do need to cut. Gather the information now, when you still have a calm, clear head. Don't wait till you actually lose your job, by which time you may be too upset and your emotions start getting in the way of rational decision-making.

Right now, do you know how exactly you've been spending your money every month? If you don't, there's a good chance that you're wasting some of it. And let's say, for the sake of discussion, that starting from tomorrow, you have to spend 30% less every month. What decisions would you make, which parts of your lifestyle would you adjust, to immediately bring your expenses down to that level?

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The Singaporean's Guide to Survival in Bad Times

So I've decided to adopt a new theme for my blog. It will become a crisis management guide. I'll be blogging about different strategies and ideas that we can use to cope better with the bad times.

As usual, I look forward to you readers adding your suggestions and feedback in the comment section of each post. You can also email your thoughts and views to me at soknenk@gmail.com.

Obviously I will cover topics such as money management and job security. However, that's not all. A prolonged financial crisis can affect many different areas of a person's life, such as his family life; his emotional wellbeing and his social activities. It will also affect decisions like whether to go back to school; whether to get married; whether to have a child, and so on. I plan to write about all of that.

The times are tough, and will get tougher. But a little ingenuity, and a little perseverance can go a very long way. For the year ahead, I wish everyone all the best!

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