Prov 6: 6-8. Go to the ant, you sluggard; consider its ways and be wise! It has no commander, no overseer or ruler, yet it stores its provisions in summer and gathers its food at harvest.
Prov 27:12. The prudent see danger and take refuge, but the simple keep going and pay the penalty.
As mentioned in earlier articles on wisdom nuggets, there were 6 recessions in the last 30 years – 1985, 1991, 1997, 2001, 2008 and 2015 – with an average period of 6 years between recessions. Getting lower prices for the big expense items such as an apartment and a car during a recession should be obvious as long as we are willing to wait out the 6 expansionary years between recessions. But it is predictably irrational that many will still buy such big expense items during the expansionary years than the recessionary years.
2 of the largest expenses in life are an apartment and a car which most will take a mortgage loan and a hire purchase loan for 30 years and 10 years respectively. If one could save up and buy at the next recession, one would have saved so much as to pay up such loans earlier than the stipulated loan tenure.
Allow me to share my personal experience as an example. My peers and I started our career in 1985. Most bought the public housing apartment in 1987 and paid up the mortgage loan by 1992. Most then upgraded to private apartment in 1994 or 1995 at the peak of the housing prices after surviving the recession in 1991. I decided to continue saving and skip the 1997 recession till the next recession in 2001 before considering upgrading. Following is the comparison of our different financial status.
||Owned HDB apartment worth $ 350,000
||Owned HDB apartment worth $ 350,000
||Bought 120 sq m private apartment for $ 975,000. Took 25 year loan of $ 600,000 and paid monthly installment of $3500.
||Continued to save $3500 per month and skip buying apartment in 1997 recession.
||Principal loan is still between $ 500K to $ 600K with 18 years’ loan repayment remaining.
||Had saved up $ 320,000 with compounded interest instead of paying monthly mortgage.
||Principal loan is still between $ 500K to $ 600K with 17 years’ loan repayment remaining.
||Bought a 210 sq m apartment for $ 800,000 with a 40% discount from 1995 prices. With the HDB apartment sold at $350,000, $ 320,000 saved up and some CPF balance, I could almost pay up the apartment without taking any bank loan.
During the good years between recession, the Certificate of Entitlement (COE) will be very high. If we can change our cars during the recession, we will save much by paying less for the COE and the depressed car price as well. Allow me to share my experience. I traded in my 5 year old Mitsubishi Lancer in 2009 for a brand new Suzuki Swift and a 7 seater APV without forking out any money. I was paying a HP installment of about $ 800 per month for the Lancer and when I took out both brand new cars at a total cost of $ 85,000, I continued to pay the same $800 plus installment for the next 10 years. The COE during the first 6 months of 2009 and the car price were so depressed that the COE offered by the car distributor was practically zero.
During recession, you can get very cheap airfare, hotel and food during vacation travel. For one vacation travel destination during the good economic years, you can enjoy up to 3 vacation destinations.
During recession, you can stretch the dollar so much for home renovation and repair, replacement of necessary old home appliances and furnishing, and purchase of new clothing. Depleting inventory becomes a top priority for all manufacturers faced with excess manufacturing capacity and you can expect very good discounted prices.
Shopping and dining offers will be in abundance during recession. Time to bless your family with treat to the finest restaurants but paying the price in fast food restaurants normally.
There is apprehension to spend during recession for fear of losing the job. To me, it is irrational fear. As there is a recession every 5 to 7 years, you still have to worry at the next recession when you have already bought a high priced apartment and a car during the good years anyway. So instead of spending during the good years, save up this money till the next recession in a separate bank account. This account should not have existed if you have spent this money away during the good years, and so you cannot treat this account as a rainy day savings account which is another separate account.