The Ultimate Guide On Short-Term Savings In Singapore
Updated as at 09 April 2023
Let’s answer the question: “Where should I park my cash savings and what is best for me?”
Defining the scope:
Before we begin, let us first define the parameters of the discussion, starting with the definition of short-term savings.
For the purpose of this discussion, short-term savings will be defined to be cash that is to be used for emergency purposes or non-negotiable items (i.e., property & marriage) and or have a duration of only 1 to 5 years.
We will be examining and ranking the instruments based on the following metrics:
the expected yearly rate of return
exposure to Interest Rate / Re-investment Risk
cap on savings amount (if any)
ease of earning the interest return
Assessing the instruments
Now that we’ve defined the parameters of the discussion, let us examine each of the instruments that we can use to grow our short-term savings.
I’ll be providing a brief description of what each of the instruments is, its pros and cons, and my personal opinion on the instrument and what it is suitable to be used for.
High-Interest Savings Account
Realistic Annual Return Rate: 2.65% to 3.85%
High-Interest Savings accounts (i.e., multiplier accounts) are often the “go-to” accounts to farm for short-term interest returns.
Generally, there are two parts to a savings account.
base interest rate – that you will get no matter what
bonus interest rate – that you will get for every criterion that you hit
Within the category, it is really difficult to spell out a clear winner as each bank’s term and conditions [T&C] differs from one another You will really have to decide for yourself, based on your current situation, which bank’s T&C suits you the best.
Be very careful about the T&C as certain banks only provide a temporary bonus interest rate – i.e 12 months – which would inflate their nominal interest return for the first year during your comparison.
Read More: Best Savings Accounts in Singapore (Seedly)
Pros of high-interest savings account:
higher interest rates
flexibility to withdraw
Cons of high-interest savings account:
cap on bonus interest rates is low (usually $75,000 to $100,000)
huge hassle to keep track of and fulfil the criteria
high-interest rate risk as the bank can and will often change the rates
I am not a fan of using high-interest savings accounts as firstly, the trouble of having to keep track and fulfil the criteria to earn a higher interest is a major turn-off.
Secondly, banks are notorious for reducing their interest rate when the market interest rate decreases which exposes savers to a high degree of interest rate risk.
Lastly, most banks have a low cap that can be entitled to the high bonus interest rate which makes it an instrument that is suitable for lower amounts and hence it is best used for items such as for your day-to-day expense account and emergency savings.
Realistic Annual Return Rate: 3.20% to 3.80%
Fixed deposits, as the name suggests, are deposits that you lock in with the bank for a fixed duration of time in exchange for a higher interest return.
The interest that is earned on your deposit depends mainly on two factors:
how much deposits would you like to lock in and
how long do you lock in your deposits for
Naturally, a more considerable deposit amount or a longer duration will entitle you to a higher interest return.
Read More: Best Fixed Deposits In Singapore (Seedly)
Pros of Fixed Deposits:
a simple way to earn interest
allow for large amounts of deposits
Cons of Fixed Deposits:
high-interest rate risk due to the short duration of the instrument
Some degree of planning is required to avoid having to break the fixed deposit
Fixed deposit is an instrument that is worth considering if you would like to earn a rather effortless higher interest on your savings for a short duration of time.
Among all the other instruments that are discussed in this article, a fixed deposit is a good instrument to use if your savings amount is rather considered as all other instruments often have a cap on the maximum “allowable” savings.
That said, it is important that you ensure that the funds that are “locked” in are funds that you do not need as early withdrawal would often result in a penalty – usually in the form of interest return clawbacks – which is, in my opinion, is still tolerable as long as the original savings is affected. (Need to read the bank T&C)
Realistic Annual Return Rate: 3.00% to 4.00%
Every now and then, insurance companies will come out with short term endowments promotions which provide a decent amount of guaranteed returns a year.
Essentially, these short-term endowment works just like a fixed deposit where you lock in a sum of money with the insurance company over a pre-determined period of time for a fixed interest return that will be paid out after the policy matures.
Pros of promotional endowment:
simple way to earn interest
Insurance coverage of 105% premiums paid
Cons of promotional endowment:
sells out freaking fast (within hours of launch – not even kidding)
heavily dependent on T&C of the promotion
the minimum amount of usually $10,000
Personal Opinion: Similar to fixed deposits, I think it is worth considering if you would like to earn a rather effortless higher interest on your savings for a short duration of time.
However, unlike fixed deposits, the penalty for early withdrawal for an endowment plan are often higher as compared to that of a fixed deposits. More often than not, the capital is not protected until the later years of the policy.
As such, you really have to plan carefully and ensure that the funds that are locked into this instrument are not needed within the pre-determined duration or risk incurring a loss from surrendering the policy prematurely.
Realistic Annual Return Rate: 3.00% to 4.00%
Singapore Treasuries are essentially short-term “loans” (6 months to 1 year) that you “buy” from the Singapore government. The logic behind how interest is earned from a treasury is the same as that of a fixed deposit where you will “lock in” an amount over a pre-determined duration of time.
The difference between a treasury, apart from the issuing institution, is the application process itself and the fact that the interest return is not transparent from the get go and is only revealed after the application closes.
You can find out more about how it works here: How To Buy T-Bills In Singapore (Seedly)
Pros of T-bills
an effortless way to earn interest
interest return is closely related to the prevailing interest rate environment
allow for large amounts of deposits (subjected to allotment)
Cons of T-bills
interest rate is only known after the application peroid
the application process can get a bit confusing
high-interest rate risk due to the short duration of the instrument
Among all the shorter duration instruments (6 months to 1 year), the treasury bill is one of the more competitive instruments in terms of interest return.
The downside to this instrument is that the interest returns and the allotted amount is not known until the end of the application period which I think is still okay.
As compared to fixed deposits, I think T-bills can be worth considering but personally, I will recommend the use of either T-bills or fixed deposits instead of a combination of both to keep your finances clean and easy to manage.
Singapore Government Savings Bond
Realistic Annual Return Rate: 2.80% to 3.20%
Singapore Government Savings Bonds are essentially longer duration “loan” that the Singapore government issues (10 years) in efforts to promote the Singapore’s bond market. Because of that, the features of the bond has made it more like a savings account rather than an investment bond.
When held till maturity, it provides the return of a 10-year government bond while enabling the bondholder to withdraw as and when you need without any penalty against your invested amount apart from a $2 transaction fee.
You can find out more about how it works here: How To Buy Singapore Gov Savings Bond (Seedly)
Pros of SSB
savings account like flexibility
ability to lock in long term interest rates for 10 years
effortless way to earn interest
Cons of SSB
interest rates are not flat and increases with time
low cap of $200,000 allowable per person
If you’re thinking of short-term savings or general savings (with no duration in mind), Singapore Government Savings Bonds may be the most ideal instrument as it allows investors to lock in the long-term interest rate for 10 years while retaining the flexibility to withdraw as and when necessary.
What this means is that when interest rates are dropping, you can secure a high interest rate for a long duration. When interest rates are increasing, you can easily refinance your bonds by selling the lower interest return bonds and buying into the newer ones with higher interest return without any penalties (apart from $2 transaction cost).
Generally, if your savings duration is beyond 1 to 2 years, Singapore Government Savings Bond is an extraordinary instrument that provides all the upside return while mitigating all the downside risks. The only issue I have with this instrument is the low allowable cap of $200,000 per person.
Money Market Funds
Realistic Annual Rate of Return: 2.80% to 4.20%
Another instrument that has been growing in popularity is the use of money market funds or cash management account by Robo-advisors.
Money Market Funds are basically a collective investment scheme that utilizes the funds to invest in short-term investment-grade bonds or treasury bills.
Pros of money-market fund:
high flexibility in withdrawals
decent interest return (depending on underlying fund)
allow for large amount of deposits
Cons of money-market fund:
capital and returns are not guaranteed and subjected to market forces
cost of investment will erode performance
savers will have to deal with market volatility
Personally, I do not view Money Market Funds and Cash Management account to be a saving instrument due to the nature and risk of the instrument.
I believe that savers will have much better direct alternatives such as Singapore Treasuries or Singapore Government Savings Bonds to gain higher interest return without exposing themselves to market risk or paying a management fee.
However, if you are interested in considering this instrument for the purpose of your short-term savings, you can read more about it: Best Cash Management Account
Not all “short-term” savings instruments are created equally, it is important that we understand the nature of the different instruments and what they are designed for to purposefully allocate our cash savings into the right instrument depending on our need for interest return, the flexibility of withdrawal and interest rate risk tolerance.
Personally, for my:
expenses & emergency savings, I will park them in the high-interest savings account
short-term savings of less than 2 years, I will park it in either treasuries or fixed deposits
general savings of more than 2 years, I will park it in Singapore Government Savings Bond
For a horizon of above 5 years, you may want to consider investments as an option. With interest rates at such low levels, investing had become a necessity rather than a luxury.
As consumers, we cannot afford to just idle our savings and watch them get eroded by the inflation rate over time. There is a sense of urgency to put our savings to work if we want to achieve our financial goals in the next 10-20 years.
You can learn more about how you can design, implement and manage a fool-proof financial plan that will help you accelerate your financial freedom progress by downloading a copy of my e-book: "The Price Of Financial Freedom” which will provide you with a comprehensive guide to help you achieve financial freedom and live life on your terms in the shortest amount of time.
If you do not know how to get started with your financial planning or if you do not have the time to manage your finances, you can consider engaging an Independent Financial Advisor who can help you make sense of the market, accelerate your progress and achieve financial freedom by 5 to 10 years earlier!
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Daniel is a Licensed Independent Financial Consultant with MAS and a Certified Financial Planner (CFP®).
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This article is meant to be the opinion of the author
This article is for information purposes only
This article should not be seen as financial advice
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