Rethinking financial stability in a crisis: Spend when you can, save when you must

Last Tuesday, I moderated the BusinessWorld insights panel entitled, “Saving, Spending, Investing: Achieving Financial Goals even amid a Crisis” with top financial advisors in the country – Aira Gaspar of Manulife, Kelvin Ang of AIA, Edser Trinidad of FAMI, and lawyer Loraine Saguinsin of UnionBank. Many of the things they said were intuitive but a lot were also quite shockingly conservative. In a study Ms. Gaspar shared of Gen Y and Gen Z’s financial habits during the pandemic, it was illustrated that they save more, are very prudent — with 77% buying necessities instead of wants, and are risk-averse with 82% not wanting to incur debt. Mr. Ang reiterated how, even as people save more in terms of habits and percentage, the absolute amount is still lower. The pandemic has affected all of us and has reduced our savings level. Effectively, in his study, 77% of respondents would like to save more with 74% looking for better returns, unhappy with the low interest rates of their bank deposits. Mr. Trinidad reiterated the Conservative approach wherein people are beginning to set financial buffers, and finally Ms. Saguinsin stressed on the elephant in the room of every home: wealth transition during eventualities.

This column builds on that discussion and is a reflection of whether and how to redefine financial stability for this current and future generations. I was taught and continue to teach to my OFW students in financial literacy the basic rules of saving one third of income as your first “expense,” of having six months’ nett salary sitting in a low-risk instrument as an emergency fund, as having life insurance once you have dependents, health insurance once you are financially independent, and finally creating an Excel table of long-term retirement goals the objective of which is to have enough passive income to cover today’s active income. Is that even now realistic? Is that even now achievable?

Active income, the salary earned from daily productivity has been reduced dramatically or in many cases (currently 7.7% of the population unemployed) – has been reduced to zero, not just for a month or two but for a very prolonged period of time. No productivity in the economy equals no active income. For anyone who has maintained their job, their incomes are highly unlikely to increase in the next three to five years, the expected timetable within which the top economists predict Philippine GDP will return to pre-pandemic levels. And yet inflation year-to-date still breaches 4%, and so prices of goods continue to soar while incomes are in contraction. And with interest rates at an all-time historical low, most investments are earning at negative real rates.

With active incomes no longer reliable, passive incomes cannot be grown. And even if there were an excess of capital to put in an investment, there would not exist an investment that would yield higher than the cost of the debt to finance it, with banks remaining conservative and having tight control over their non-performing loans.

All this, of course, is subject to even more pain: the relentless possibility that the emergency is no longer a surprise unprecedented event, but rather something statistically more likely to happen than not, if one is not extremely careful. How can insurers even make money these days? How can they pool the assets of their beneficiaries to spread the risk when everyone is at equal high risk? Where would the diversification happen? We may as well keep the money for ourselves, because if you think of it theoretically, as a healthy person, putting your money in an insurance fund would be funding someone at-risk today. And yet we keep thinking in our heads, insurance is a must. A tough nut to wrap my head around. We need to rethink the theoretical role of insurance when “everyone” is to be withdrawing from the insurance fund all at the same time.

All forms of financial literacy training have gone out the window in these times. When my friends ask me where they should invest their money, I must answer: keep the cash. It was the same sentiment in the event today: stay austere. Cut expenses. Focus on spending for health, the bottom of Maslow’s hierarchy of needs, stick to the basics.

And yet if we all did this, if we all decided to save instead of spend, wait for active incomes to improve before we invest, how would the economy’s wheels ever turn? Indeed, I can live for extended periods of time without shopping, without eating out, without using my car. But where would that leave the retail industry, the restaurants, the real estate sector, the banks (if indeed I never would need to borrow money)? Ultimately everything would stop and we would go back to the days pre-Adam Smith where I would do my trade and you would do yours and we self-sufficiently maintain our lives detached from a financial and market economy wherein we instead focus on our health and well-being, just another example of the failures of Capitalism.

What then is my solution? I had said this before. I had thought about it quite a lot. I had to think that my consumption and my spending benefits another person in terms of income. This income would eventually make its way back to me, whether in higher pay or dividends of a company that gets an improvement in bottom-line, or price appreciation of properties in a booming economy. And I believe that today our financial health will be more and more cyclical. Gone are the days when we would build wealth slowly to relax at the end of life. When is the end of life anyway? Is it not imminent these days? Here are the days of enjoying wealth when we can, being austere when we need to be, regaining it and losing it.

And therein lies the diversification play: when peoples’ incomes will fluctuate dramatically from plenty to little to plenty to little, we must spend in times of plenty and save in times of little to get back to plenty. A restaurant meal when I get my paycheck. A donation to the community pantry when I have spare cash. A small ayuda bonus to my employees when things are better. It is psychologically liberating to look at a bank account and feel stability, and that is important. But whenever your mental health can withstand a hit, perhaps we can consider choosing to feel a little discomfort in our financial situation to contribute to someone else’s desperate need for a reprieve.

Daniela “Danie” Luz Laurel is a business journalist and anchor-producer of BusinessWorld Live on One News, formerly Bloomberg TV Philippines. Prior to this, she was a permanent professor of Finance at IESEG School of Management in Paris and maintains teaching affiliations at IESEG and the Ateneo School of Government. She has also worked as an investment banker in The Netherlands. Ms. Laurel holds a Ph.D. in Management Engineering with concentrations in Finance and Accounting from the Politecnico di Milano in Italy and an MBA from the Universidad Carlos III de Madrid.