If you’re squirreling money every month for a rainy day, you’ve probably thought about ways to maximise these savings. A savings account with a traditional bank pays you peanuts in interest, or worse, no interest. This is even though your money could be put to work in other options that give you a similar level of access (or liquidity). Parking your savings in a higher growth vehicle lets you earn compounded returns. Over time, you’ll have more to cover your growing expenses as you start your family and plan for your children’s education. So what are your options for alternatives to the standard savings account? Here are five lower-risk choices to think about.
Common Savings Account Misconceptions
A savings account with a traditional bank is the safest way to keep your money, isn’t it? Most of us seem to think so, since they keep the bulk of their savings in such accounts.
If this is you, it’s likely inflation is nibbling away at the value of your savings. This happens when the inflation rate (the general rise in price levels) is higher than the interest rate on your account. In developed economies like Singapore, the inflation rate hovers at around 2% and standard bank account interest rates are around 1.5%. This means your money is losing value every day.
As such, playing it a little kiasi can turn out to be a risk in the longer term, as you miss out on preserving and growth opportunities. For those looking to support their kids’ education or planning a comfortable retirement, staying with just a savings account is selling themselves short.
Benefits to Saving Money Early
Half of us Singaporeans say we don’t have enough savings to last us at least three months. Saving early also gives you time to build up an emergency fund. When you start saving money earlier rather than later, your money benefits from the compounding effect. This is where your reinvested returns accelerate growth. If you earn interest or other returns on your savings, you reinvest it and boost your returns.
Additionally, starting early makes it easier to save more. Don’t need to be a hero and count every cent and strain to save $2000 a month to reach $132,000 after five years, at 3%. Instead, start five years earlier, save an easy peasy $1,000 a month, and have $141,440 after 10 years (at 3%). Your financial situation may be different, but the point is to make your savings habit sustainable over the long run. So it’s that simple: starting earlier makes it easier to save more and gives your money more time to grow.
Alternative Low- Risk Investment Vehicles
Consider these lower-risk investment vehicles to get your extra savings working harder for you. Keep in mind some might have minimum-balance requirements and limits on transactions.
1. Stocks
Stocks let you invest in publicly listed businesses. If the stock rises in value, you could get a great return, BUT the risk is you could lose everything you put in. So don’t play play, go into stocks only when you are sure of this method of investing and are ready to tahan the waves. High dividend stocks pay you a period dividend, which you could reinvest to further grow your savings. Overall a high dividend stock could provide a 3%, 4% yield.
With stocks, the ideal strategy might be to allocate just a portion of your savings apart from your emergency fund into this option. That way, you’re not risking your safety net but still maximising potential yield. You can invest via a broker or directly through online platforms.
2. Bonds
Bonds are medium- to long-term securities that could give you a better return than a standard savings account. Bonds can be issued by companies or by the government. The Singapore Savings Bond, for example, is offered by the government and about as safe as you can get.
With a bond, you’re effectively lending your cash to the government or company in exchange for the yield. However, bonds can fluctuate in value just like stocks. As such, one way to minimise risk is to invest in bond funds through an exchange-traded fund (ETF). This means you’re buying into multiple bonds rather than just one single issue.
3. Annuities
Those planning for retirement could do themselves a big favor by putting extra savings into annuities. Annuities are technically insurance contracts. What’s great about them is they will, confirm plus chop, give you fixed periodic amounts, usually during retirement. Depending on the annuity, they can pay you for as long as you live (shiok sia) or for a specified period of time. The CPF LIFE annuity is the only one backed by the Singaporean government.
You can take advantage of annuities even if you’re not planning for retirement just yet. Some mature within a year and others mature within 10 years.
4. Money Market Accounts
Opening a money market account is one of the simplest alternatives to traditional savings accounts. These provide similar features to an everyday transaction account with liquidity and easy access. However, they tend to provide better returns, likely 0.25% to 1.0% better. These accounts outperform standard savings accounts because your money is invested in short-term instruments that typically mature within three to six months. However, double-check the terms to make sure you’re good with them. These accounts might have conditions like minimum balance, limits on withdrawals per month, and other restrictions. Don’t be a blur sotong and later tio shock.
5. Gold
There’s a reason why gold is always associated with huat, and why the Cai Shen Ye/God of Fortune is always carrying gold ingots. Gold is another safer way to protect your savings from erosion and potentially make some strong gains. Gold has maintained its value through thousands of years of human history. It’s seen as a safe harbour investment during volatile periods. Since the value of gold tends to go up when stocks and bonds drop, it’s an excellent investment for diversification. You don’t actually have to buy and store gold as an investor. Buying into a gold-backed exchange-traded fund or other gold-backed options is an easy way to invest in gold.
There are a number of options to consider when investing in gold, from buying physical gold itself, which has its own positive and negative attributes, including resilience against paper currencies. You can also consider using platforms such as Hugo’s Gold Vaults which will allocate gold to you in your mix of day-to-day investment options without having to completely remix your investment portfolio.
Summing up…
If you’re looking to grow your wealth, a traditional bank account probably shouldn’t be the only tool you’re using. They’re great for keeping some cash on hand for emergencies. An ideal wealthcare product might be a product that combines the best of an everyday transaction account with savings and investment features. Check how much risk you’re comfortable with, and review how much liquidity (easily accessible money) you need. Lower-risk investment vehicles like stocks, money market accounts, and gold can put your savings to hard work and grow them faster.