As we grow older, we often hear cases of our friends or relatives falling on tough times. Some of them may have experienced an illness like cancer and had to stop working. Others could have been retrenched or lost their jobs because the companies they work for were cutting costs or had stopped operating. Some of them may have had enough savings to last them through the tough period before they recovered and started working again. On the other end of the spectrum, there were others who may not have enough savings and had to ask relatives and friends for money. If such an event happens to me, I hope I never have to go around looking for money.
It makes good sense for us to build up an emergency cash fund to take care of such stormy days. The usual recommended emergency fund should be large enough to provide for at least 6 to 12 months of our living expenses. For example, if we need an average of $4,000 per month to take care of our loan payments and other recurring bills, then we should build up at least $24,000 to $48,000 of emergency cash savings.
However, putting a large sum of money in a bank deposit earning low returns can also be quite frustrating. A quick check on local banks’ current deposit account rates shows that they are still paying a paltry 0.05% p.a. interest. Fixed deposit rates on the other hand, are more attractive at 1% plus. There are sometimes higher promotional fixed rates if you transfer your savings to a different bank but those promotions usually end after 1 to 2 years. After that, it is back to hunting for other banks’ promotional fixed rates, a cycle that I don’t have the patience for unless I am a retiree.
But since last year, we have a good alternative that pays better than bank deposit rates and doesn’t involve us running from one bank to another bank every 1 to 2 years. The Singapore Savings Bonds (SSBs) was launched by the Singapore government to help individuals potentially achieve higher returns (currently in the range of 2 to 3% p.a. if kept for the full 10 years) than normal bank deposits. They are also fully backed by the Singapore government and they come with the flexibility that allows us to redeem before the 10 years are up without any penalties. For more details, you can check out more info here.
That doesn’t mean we should put our entire emergency cash fund into the SSBs because bank deposits are still one of the most liquid forms of money that we have, besides hard cash. The SSBs may take up to 5 to 6 weeks to redeem if we just missed the monthly withdrawal date. Thus if I set aside 12 months of emergency cash provisions, I would keep at least 3 months in a bank deposit account and the rest in the SSBs. This will help provide me a balance between liquidity and higher returns.
After you have set aside your emergency funds, you can then consider investing the rest of your savings to potentially achieve higher returns. Depending on your own risk profile, you may prefer investing in stocks, unit trusts or longer-term lower risk savings products. You should discuss the most appropriate savings/investment option for yourself with your financial planner, after you have taken care of your emergency cash fund. Because, as the Scout’s motto goes: Be Prepared!
Ernest Low holds an MBA from University of Liverpool and is the Head of Investment & Wealth Management with AXA Life Insurance Singapore. He has also written a money management book for kids called Starting Small Finishing Rich.