Saturday, August 22, 2015

Why Singaporeans Fight About the Gini Coefficient, and What it Means to You (Guest Post)

Gini Coefficient
As the General Election heats up, you may hear the term “Gini Coefficient” brought up a lot. This is a big bone of contention, as it measures the income gap between the rich and the poor. In this article, we take a look at where you stand, and what you can do personally to close your wealth gap:

What is the Gini Coefficient?

The Gini coefficient is a way to measure the distribution of wealth in a country. It is a scale from 0.0 to 1.0. A score of 0.0 indicates perfect distribution (every household has the same amount of money), whereas a score of 1.0 indicates that one household has all the money. 

Governments track the Gini coefficient over time, to ensure wealth does not become too heavily concentrated in the hands of a few. When the Gini coefficient gets too high, there will be less social mobility (the rich get richer and the poor get poorer). Another consequence is social unrest. Corruption and violent crime, for example, tend to coincide with high Gini coefficients.

When the government determines that the Gini coefficient is too high, redistributive processes are implemented. An example of this is raising taxes on the rich, and redistributing it to the poor in the form of subsidies.

This is Singapore’s Gini coefficient up till 2014:

The blue bar (calculated after accounting for transfers and taxes) shows a lower coefficient. This is based on the assumption that, due to policies such as higher taxes on the rich and GST vouchers, the real Gini coefficient is lower than it appears. 

Singapore’s Gini coefficient (0.464) is somewhat on the high side. The highest Gini coefficient has historically been in Hong Kong (around 0.537), and the lowest in Norway (around 0.256). 

A desirable Gini coefficient is a matter of opinion, not a fact. This is why you will hear intense political debate, over the coming months, about what number is “right”. 

In some schools of thought, a number exceeding 0.4 is unfair. To others, it is only important that the Gini coefficient remains fairly flat over a period of time.

In addition, each country has different ways to calculate its Gini coefficient. Critics often point out that each government will use a biased method, to make the numbers seem lower than they actually are. It is up to you, for example, to decide if we have a Gini coefficient of 0.464 or 0.412.

It boils down to whether you believe the government's taxes and transfers improve income inequality. If you do, it makes the lower number valid. But all that being said...

What Does the Gini Coefficient Mean to You Personally?

The relatively high Gini coefficient indicates a significant rich / poor divide; one you can’t cross your fingers and hope will vanish. You need to take your own steps to be the right side of this income gap. Here are some steps you can take:

Focus on income growth, not just budgeting

Have a smart system for picking loans and clearing them out

If you can afford to, narrow the gap yourself

1. Focus on Income Growth, not Just Budgeting

Saving money is important, but it’s not enough. You need to be growing your money as well. Remember that inflation chews up around 3% of your wealth every year, and you need to be able to keep pace with that.

You should have a portfolio that provides returns beating the rate of inflation by at least 2% (look for 5 - 7% returns). This is achievable with many insurance policies, REITs, and index funds. Alternatively, work on building a side-business with consistent earnings.

2. Have a Smart System for Picking Loans and Clearing Them Out

One of the things which keeps people in poverty are loans. Too many people are terrified or bored of banks, and end up taking the very first loan offered to them. In many ways it’s hard to blame them, because when you have 140+ banks in one country the options get confusing.

But picking high interest rate loans is one of the key reasons people stay poor. It ranks right alongside misusing credit cards (use them as a mode of payment, not a source of borrowed money).

Whether choosing a home loan, education loan, personal loan, etc., you need to be picky about the interest rate and repayment terms. For advice on how to pick a good loan, follow this blog. And you can find the best loan with our comparison tools at, we’ve already picked out the cheapest ones. 

And if you’ve had to take a loan, learn how to consolidate debt to get out of it faster. Loan repayments are a gigantic poverty anchor weighing you down. Use balance transfers to shift multiple credit card loans into a single, zero interest credit card loan. Or even consider using a low interest personal loan to pay off higher interest debts.

3. If You Can Afford to, Narrow the Gap Yourself

The simplest way to narrow our income inequality is with direct action, from those who can afford it. You don’t need to wait for the government to narrow the gap. There are plenty of charity organisations who help the underprivileged. 

Every dollar you contribute to them helps to narrow the gap a little bit. And it the long run you’re ensuring a safe, harmonious home to live in. A society with few desperate people tends to be a safe and pleasant one.

This article is contributed by Allyson of

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