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A different type of piggy bank

Stuffing our cash into a piggy bank is not going to bring home the bacon, so to speak. In today’s rising rate environment, there are several low-risk alternatives that offer far higher yields or interest rates than the paltry 0.05 per cent that you’d earn with a basic deposit account.

Some key considerations to look into when it comes to investing your cash:

• Investment objective (What am I hoping to achieve from this?)

• Risk profile (Will I be able to sleep at night?)

• Timeline (When do I need this money that I’ve invested?)

• Liquidity (Will I need this cash in the near future?)

• Financial situation (Do I have enough money for my current needs?)

As a rule of thumb, the shorter your timeline, the less risk you should take. Also, everyone should keep emergency funds of at least three to six months of expenses in extremely low-risk and liquid instruments (yes, it’s possible!). These can be in the form of SSBs, T-Bills and even certain high-yield savings accounts, which we will explore later.

👀 Options out there

• Let’s start with T-bills, or

These short-term government bonds are all the rage for the simple reason that their yields are pretty sweet right now. T-bill yields soared to above 4 per cent in October 2022 from less than 1 per cent at the start of the year. Fun fact: The last time yields crossed 4 per cent was in 1989!

TLDR on T-bills

• Government bonds that the MAS regularly issues, with maturities of 6 months or 1 year.

• Issued at a discount to their face (or par) value, so investors receive the face value at maturity.

• Minimum investment amount of S$1,000.

• Non-competitive bids are allotted first, capped at 40% of total issuance. The rest goes to qualifying competitive bids.

• You can use cash, CPF or SRS funds to apply. For cash, you can go through DBS, UOB or OCBC. You must have an individual CDP account with direct crediting services activated.

With the US Fed potentially nearing the end of its rate hike cycle, T-bill yields seem to have peaked in December before steadily going down with each subsequent auction. While the latest auction result of 4 per cent for the T-bill with a six-month tenor is still respectable, there is less certainty that yields will remain elevated in the coming weeks.

For now, the six-month T-bills have a higher rate of return compared with the one-year T-bills due to the inverted yield curve, as investors believe that rates will go down in the future.

Even though it makes sense to choose the shorter tenor as it offers a higher rate, think carefully if you want to lock in your money for a longer period. There is no guarantee which way rates will go in the future, and you may not be able to reinvest the money at a similar yield.

While there are no penalties for selling T-bills before maturity, investors may not be able to get back the full amount they put in because market prices can vary.

• SSBs

Whether you need high liquidity for emergency funds or have slightly longer-term goals of up to five years, SSBs have a little something for you. While they have admittedly cooled this year as the 10-year interest rate average slid under 3 per cent, SSBs could still be a place to park your spare cash if you want to get interest for a longer period. 

With SSBs, there’s no penalty for redeeming them early, but the yields get better the longer you hold them. SSBs can be redeemed in any month for a S$2 administrative fee. The minimum sum of S$500 is also lower than T-bills, and interest is paid every six months.

• Fixed deposits

Once an unsexy option more suited for risk-averse individuals or retirees, these are making a comeback thanks to rising interest rates. Currently, some banks are offering promotional rates above 4 per cent for less than a year. This is less liquid as your money is locked up for a fixed period of time, and there is typically a penalty for early withdrawal.

• High-yield savings accounts

These retail products can offer mouthwatering rates, but unlike T-bills, SSBs or fixed deposits you usually have to jump through hoops to get those yields. For instance, you might have to hit a minimum credit card spend, and maintain a minimum sum in the account. Check the criteria very carefully as the headline rate might not be the effective rate. Also, be prepared for the banks to change the criteria at their discretion.

💸 Investment strategy for young adults?

If the attractive rates of fixed-income instruments have you sold, think twice if you plan to throw all your savings into the ring.

While financial experts concur that there is no one-size-fits-all approach to investment portfolios, most believe that younger investors can benefit from taking a bit more risk. Instruments like equities, Reits and higher yielding fixed income instruments could also come into play.

“For longer-term goals, money market funds and short-term fixed-income instruments only work for people that are extremely risk-averse,” says Michele Ferrario, co-founder and CEO, StashAway.

This investment philosophy is broadly echoed by Evy Wee, head of Financial Planning and Personal Investing, DBS. With time on their side, she believes that younger investors should invest in a way to “reap the benefits of compounding and consider a certain allocation into equities”.

Both SSBs and T-bills do not offer compounding returns, which means reinvesting earlier profits.

Even as the 60:40 (60 per cent equities and 40 per cent bonds) investment strategy makes a comeback, what’s most important for every investor is to diversify, she advises. 

Plonking all your money into T-bills or fixed deposits might not make sense as these short-term investments don’t beat Singapore’s core inflation rate of 5.1 per cent.

Weigh your options before making a decision, but just don’t sit on your cash for too long. Even a 4 per cent interest rate is better than nothing at all. 😎

TLDR:

• Consider your risk profile, timeline and liquidity needs before parking your spare cash.

• T-bills can be a great place to put spare cash for the short term.

• Weigh the pros and cons of alternatives such as SSBs, fixed deposits and even high yield saving accounts.

• No such thing as a one-size-fits-all portfolio for young adults, but diversification is key.