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  • Writer's pictureDaniel Lee

Managing your money in a low-interest-rate environment

Like it or not, the new age of money management has arrived.

If you do not adapt to the changes that have occurred over the years, you are in deep sh*t. (sorry, I cannot find a better way to communicate this point across).

In this article, I will be sharing with you the changes that had occurred over the last 3 decades, their impact, and how we should adapt and position ourselves for the next three decades.

The playing field has changed drastically

Over the last 30 years, the key change that killed the old age of money management is the decline in interest rate.

Previously, putting your money in the bank could earn you a respectable 6% a year back in the 1980s. Today, the deposit interest rate is at 0.12% a year.

Such a dramatic, yet steady decline in the interest rate had killed off the role that bonds and bank deposits play in the area of money management.

Previously, it was still possible for someone with zero financial planning knowledge to accumulate wealth by blindly saving and stashing away (no pun intended) their hard-earned salary into the bank.

For the savvier investor, the use of bonds and the classic 60% equity / 40% bond portfolio allocation worked well as the high-interest return from the bonds helped cushion the volatility of equities during the bad times whilst providing a stable return during the good time.

All in all, from a technical standpoint, money management back in the 1980s and 1990s was much easier thanks to the high-interest rate environment.

But as interest rates declined drastically, the old ways are no longer relevant.

If today, you were to blindly save your hard-earned salary into the bank, you will realize that the savings in your bank will provide you with the same returns as saving it under your pillow.

If today, you were to blindly adopt a 60% equity and 40% bond portfolio allocation, over time you will realize that the bonds are dragging your upside performance without helping much during the downsides.

The role of bank deposits and bonds have changed and unfortunately, these two instruments continued to remain the biggest allocation in most of our portfolio.

The first step is to the new age of money management is to recognize that old strategies and instruments may not work in the new environment that we are currently living in.

Key principles have not changed

While the environment that we operate in may have changed, the key money management principle has not.

The key to money management is achieving a proper balance between your liquidity needs, risk and return in relation to your financial objective.

To do that, you need to:

  1. Understand the role, liquidity, risk and return of each financial instrument

  2. Include the right instrument at the right proportion...

to achieve the desired balance that will deliver the performance that you need to achieve your financial objective.

The difficulty in doing so lies in having to adapt to future economic changes and their impact on the role and use of the different financial instruments. What may be relevant today may not be relevant in a few years time.

That is where we as financial advisor add value but that is a topic for another day.

Navigating the new age of money management

Whatever that I am going to share now is based on my opinion, different people may manage their money and structure their portfolio differently based on their needs, comfort, and situation.

So really, please seek proper financial advice if you are not certain that what you are doing is suitable for you. (shameless self-plug but yes, financial mistakes are costly, do not YOLO it)

Here is how I do it:

Short-term planning (1-5 years)

When it comes to short-term planning, I strongly believe that we should NOT risk the money at all as the money is essential and non-negotiable.

Simply put, you cannot afford to take any risk at all when it comes to short term plans.

Think about it, can you afford to delay your marriage or renovation just because you have invested the money needed into the market and it is not performing up to your expectations.

Because of that, I prefer to set aside the cash flow needed in the following different instrument depending on my needs.

  • Bank deposits: day-to-day expenses

  • Money-market funds: short-term and emergency saving

Sure, the returns of these instruments are negligible, but the priority when it comes to short-term planning should be on lowering your risk and increasing your flexibility AND NOT chasing after returns.

Balance my friend. Balance.

Med to long term planning (10-20+ years)

For plans that med to long term, everything will be invested to chase for a higher return to accelerate the wealth accumulation process.

We live in an era where There Is No Alternative.

Simply put, you cannot afford NOT to take risks when it comes to things that are longer-term of nature.

With the interest rates at rock bottom, you will not be able to generate the returns you need to achieve your long-term goal if you do not take on some risk.

Which is scarier:

Taking on risk doesn’t mean you have to do it blindly.

Just because you need to invest doesn’t mean you should blindly put it in a blue-chip investment or Robo-advisor just because the public recommends it.

Let me remind you of the few blue chips that flunked badly (e.g. Nokia, Swiber, SPH, Hyflux) or Robo-advisors that closed down (e.g. smartly, pending for more?).

Investing blindly is like buying ingredients without knowing what the recipe of the intended dish is. You may end up buying things you don’t need or things that will ruin the entire dish completely.

The next question that you need to answer would be:

  1. What instrument should you consider (equity/bond/etc.)?

  2. What should you invest in and why?

  3. How much should you invest in total?

  4. How much should you allocate to each investment?

  5. How should you manage your investments?

While it is impossible for me to shed light on question 1-4 as I do not know your situation well enough to provide quality advice, I can shed some light on how I do things for question 5.

For me, here is how I am managing my money that is meant for the long term:

Personally, the main bulk of my returns comes from my equity investments. I do not have any exposure to other asset class (i.e., crypto), but I do recognize their potential to provide you with the additional returns that you may want to have.

With regards to the proxy of bonds, I am mainly relying on CPF ordinary and special account to serve the role of the long-term bonds for my portfolio.

The use of CPF is a tricky topic that deserves an article by itself so I will be going in-depth on this topic and how I use this instrument class to act as the proxy for bonds in the new age of money management.

Follow my telegram channel here to stay updated for future updates here.

Apart from equities and CPF, I am also making use of short-term investment-grade bonds to park the funds that I have sidelined when I have decided to take profits or reduce my risk exposure to the investment markets.

The rationale for doing so is because short-term investment-grade bonds are less sensitive to actual movements in the equity market. Because of that, they are good to reduce your risk exposure when you feel that the market is inflated and that a correction or recession is about to come.

Long story short

Jesus. This is a longer than expected article.

Anyways, the point of this article is to help you understand how you should manage your money in a low-interest-rate environment.

If you want to be financially successful in your money management moving forward, you need to

  1. Acknowledge that the old way of money management is over

  2. Avoid taking any form of risk for your short-term plans

  3. Invest your money for your long-term plans

  4. Manage your risk and not do things blindly

Ultimately, you want to achieve a proper balance between your liquidity needs, risk and return in relation to your financial objective.

Alright, I think I’ve made my point in this article.

Should you want to stay updated on my future articles, please consider joining the telegram channel here:

If you’re looking for an independent financial planner to help you tailor your financial plan or provide you with a second opinion, do check out what I have to offer here:



This article is meant to be the opinion of the author

This article is for information purpose only

This article should not be seen as financial advice

This advertisement has not been reviewed by the Monetary Authority of Singapore

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