You might have heard of the saying cash is trash. While there is some truth to it, given cash's existence as a non-productive asset, cash is the best liquidity solution available. If something extremely bad happens, you'd definitely want to be have easy access to cash.
Cash's role in financial planning is giving you liquidity should the need arise. Therefore, the guiding principles when deciding how you deploy cash for investments should be as follows:
- Cash should be easily withdrawn when needed (timeliness)
- Cash should be readily available when needed (availability)
- Cash should not lose value (protection)
- Cash should be sufficient for the need (coverage)
In this guide, we explore some of ways you can deploy cash in Singapore and evaluate their pros and cons.
Cash in bank deposits
Cash deposited in a savings account bank is often the most common way of deploying cash.
Savings accounts offer easy access to cash - from bank branches to ATM machines and online banking - you get a wide range of accessbility options. It is typically one of the safest places to store cash given that bank deposits are guaranteed up to S$75,000 in Singpore.
- Easily and readily available
- Flexible in deposits and withdrawals with no lock-ins
- Extremely low interest rates
- DBS Multiplier
- UOB One
- OCBC 365
- Maybank Save Up
- SCB Jumpstart / Bonus Saver
- CIMB Fast Saver
Fixed deposits take savings accounts one step further by taking your cash deposits with a bank and have them earn interest by commiting them for loan over a fixed period.
They are also extremely low risk investments, and by commiting to lock in at the interest rate offered by the bank for a fixed duration, the bank tends to offer you higher interest rates compared to a savings account.
- Higher interest rates compared to savings accounts
- Low risk
- May require a high minimum amount for deposit
- Interest rates aren't that fantastic either
- Interest rates might increase after you locked in your deposits
- Funds are locked for the duration of the fixed deposit and cannot be withdrawn
- CIMB (0.95% | 1 year | $10K minimum)
- DBS (0.6% | 8 months | $1K minimum)
- ICBC (1.1% | 1 year | $500 minimum)
- Maybank (0.6% | 36 months | $1000 minimum)
- UOB (0.8% | 15 months | $20K minimum)
Singapore Savings Bonds
Singapore Savings Bonds (SSBs) are a type of Singapore Government Securities issued and guaranteed by the Government of Singapore. They represent a way for ordinary Singaporeans to lend money to the government in return for capital guaranteed interest.
- Low risk and guaranteed by the government
- No lock-in period but may take up to 1 month for funds to arrive
- Step-up interest which increases every year up to 10 years
- Limited investment, up to $200K per person only
- Inability to be used as collateral
Short term endowment plans
Short term endowment plans are another alternative for putting idle cash into good use. They are offered by financial institutions or insurance companies and offer attractive guaranteed maturity returns on a single endowment premium that's paid upfront, with a life insurance component thrown on top.
- Relatively low risk (risk is the issuer goes bankrupt)
- Higher returns compared to savings deposits, fixed deposit and SSBs
- Funds are locked in, early termination would result in losses
Cash management funds
Cash management funds are financial instruments that invest in a basket of short-term bonds and money market instruments. These are more complex that the above instruments, and depending on the fund you're investing in, your funds might be invested in bond funds of different durations and risk.
Most cash management funds will invest in shorter duration bond funds to easily reinvest in higher yielding yield-to-maturity funds when interest rates rise in future.
- No limits
- Very flexible when it comes to deposits and withdrawals
- Higher interest rates
- Very liquid and can be withdrawn in days without penalties
- Diversified risk profile as the fund invests in bonds from multiple companies
- Capital loss is possible as fund prices are impacted by interest rates
- Some element of corporate risk
- LionGlobal SGD Money Market Fund
- Phillip Money Market Fund
- UOB United SGD Money Market Fund
- Eastspring Investments Cash Management Fund
- FSM One's AutoSweep
- StashAway Simple
- Endowus Cash Smart
- Syfe Cash Plus
- GrabInvest AutoInvest
Recommended cash management strategy
We recommend having a very clear reason for keeping cash. In our opinion, cash should always be invested.
However, there are reasons why you should always keep some cash as liquidity:
- Emergency funds
- Working Capital
- Short-term needs
- Investment opportunities or war-chest
Emergency funds are money stashed away that you can use in emergencies. This creates a safety net that you can fall back on when you need cash in case of financial distress:
- When you lose a job or decide to resign temporarily
- Medical bills
- Emergency loan
- Friends and family needs
Working capital is money for your day to day capital and cash requirements. It doesn't need to be a huge amount, and we recommend keeping a maximum of 3 months' worth of expenditure here.
- Food, transport, shopping, rent, taxes
- Bill payments
- Credit card payments
- Petty cash
This pot of funds are reserved for any upcoming expenses that you would require in the next 1 to 3 years. This could be:
- Wedding and wedding rings
- BTO downpayment
- Travel expenses
Investment opportunities or war-chest
The last pot of cash is often used for taking advantage of investment opportunities that may arise. For example, this could be:
- Buying a market dip or correction
- Buying a business or property
- Buying any distressed assets
- Higher risk lending to less credit worthy borrowers
Aside from the above reasons, there are limited reasons to hold excessive cash. Cash is always losing its power due to inflation; and holding too much can put your long-term financial goals in danger.
We recommend finding the optimal size of your cash needs and deploy them in the right instruments based on their characteristics of availability, timeliness and risk.
In economic downturns, holding more cash is ideal as they can offer protection against distressed selling of your long-term assets that you're using for retirement. They may also give you the ability to buy in at cheap prices in a risk-off environment.
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