The most important things one can do to improve finances are to save and invest (and also insure). Thankfully, the majority of Singaporean millennials are reportedly keen on the idea of investing and saving money. Most are however, unaware of the steps to take when attempting to build wealth. For instance, which should be prioritised in order to grow wealth more effectively – a savings account or investment in stocks?
Should you even get involved in the stock market, especially if you are risking a portion of your earnestly-built savings account to invest?
To get to the bottom of all this, let’s take a closer look at the functions and potential gains of both savings accounts and the stock market.
Will a savings account help me grow wealth?
So here’s the skinny: putting money in a savings account doesn’t necessarily make more money; it simply conserves –to an extent.
The interest earned from depositing money into a savings account essentially offsets some inflation costs. Thus, you may not actually be growing your money – or if you do, the gains are not likely to be significant.
To illustrate this point, consider that the estimated inflation rate for Singapore in the first quarter of 2020 is approximately 0.8%, and it could rise to as much as 2.00% over the course of the year.
At the same time, the average maximum interest rate (base plus bonus rate) offered for regular savings accounts, with minimal conditions imposed by banks, are at best 0.5% to 0.8% per annum.
While this is a simplistic view of inflation and savings rates, it does indicate that interests earned in regular savings accounts tend to only minimise the effects of inflation.
What about high-interest savings accounts?
If you are placing your money in a high-interest savings account, let’s say with a maximum interest rate of 3.50% p.a., the interest gains would still be rather marginal. This is when compared to potential positive stock market gains that could range from a modest 6% to a highly optimistic 12% annually (though capital losses are possible too).
And keep in mind that interest rates above 3% are highly optimistic in terms of savings accounts.
Typically, the higher interest rates on these types of accounts are formed from bonus rates that are paid if the account holder fulfils certain conditions.
For example, portions of bonus rates will be paid when you maintain the required high account balances (e.g. $50,000 to $100,000), minimum spend with an eligible credit card, and use the account to pay for bills.
So should you still save money in a savings account?
Even though it won’t yield mega returns, a savings account is still incredibly important, as it helps you safely store cash with little to no risk, and hedges inflation as well.
This is because, all full banks and finance companies in Singapore are insured to cover deposits in savings accounts for up to $75,000.
Moreover, your money would earn nothing if stashed in your den – and it would still be subject to losing its value from inflation over time. Thus, a savings account is definitely a step in the right direction when attempting to improve one’s financial situation.
Building a healthy savings account should also precede investing, if you plan to invest.
How to build a healthy savings account
Apart from setting a savings goal and consistently making deposits (automate, if necessary), it is important to choose the right savings account for your needs.
In order to save more effectively, do opt for an account that is compatible with your deposit plans and wealth goals, and if it has easy-to-earn high interest rates – all the better!
As mentioned, high-interest savings accounts often come with conditions that are not easily met.
Thus, when you find a savings account with high-but-heavily-conditional interest rates, make sure you are able to fulfil most of the conditions.
Otherwise, it may be better to choose an account that offers a lower maximum interest rate that is easier to achieve. At least this way, you are likely to earn more than the average base rate of 0.05%.
| See also: Why your savings amount matters more than a high interest rate |
To help you achieve your savings goals more quickly, check out our top savings accounts picks!
Top 3 Savings Accounts in 2020
UOB One Account
The UOB One Account is a prudent choice whether you plan to save smaller or larger sums, and moreover; its bonus interest rate requirements are relatively doable.
Here’s how you can earn up to 3.88% p.a with this savings account:
- Meet the minimum card spend of $500 each month (on eligible cards), and credit your salary or make at least three GIRO debit transactions a month
- Maintain a monthly balance of up to S$75,000
If you are only able to meet the minimum card spend of $500 a month, you can still earn interests of 1.50% p.a from the first dollar.
Last but not least, this account offers another interesting feature: 5% cash rebate for spending with the UOB One Card (terms apply).
*Note that every dollar deposited above S$75,000 will revert to the base rate of 0.05% p.a.
Citi InterestPlus Savings Account
The Citi InterestPlus Savings Account might be especially interesting to people who are considering a home loan with the bank.
This is because you can earn an additional bonus interest of 1% p.a. when you take out a Citibank Home Loan with a minimum loan sum of $250,000.
Other things to do to make up the maximum bonus interest rate of up to 3.6% p.a. on the first $50,000 in the account include:
- Spending a minimum $25 with your Citibank credit card (0.1% p.a.)
- Monthly insurance premium payment of $250 for 12 months or a single premium payment of $25,000 (1.2% p.a.)
- Making a monthly deposit of $250 for 12 months in a Regular Savings Plan, or a lump-sum purchase of $25,000 in unit trusts (1.2 % p.a.)
This account might be better suited for savers who are planning on depositing higher figures into the account, as the minimum initial deposit and monthly balance are $15,000.
Standard Chartered Bonus$aver
The Standard Chartered Bonus$aver offers one of the highest bonus interest rates of up to 3.88% p.a. on the first $100,000 deposited into the account.
Furthermore, of what you’ll need to do to earn the bonus rate, most of it is fairly achievable.
Here’s how to make up the maximum bonus interest rate:
- Spend a minimum of $500 or $2,000 on your credit to earn interests of 0.78%p.a. or 1.78% p.a. respectively.
- Credit your salary (minimum $3,000) to earn interests of 1.0% p.a.
- Invest in an eligible unit trust with a minimum subscription sum of $30,000 or buy an eligible insurance policy with a minimum annual premium of $12,000 through Standard Chartered to earn an additional interest rate of 0.75% p.a.
- Pay three eligible bills of at least $50 each, from your Bonus$Saver account via GIRO or online banking to earn an additional 0.25% p.a.
Compare Savings Accounts on GoBear
Now, if you find it difficult to avoid unnecessarily withdrawing from your savings account, the penalty imposed on a high-interest fixed deposit account for early withdrawals might deter your inclinations.
What’s more, these types of accounts, which some may consider ‘investment-adjacent’, offer a safe and modest way to ‘grow’ your finances.
| See also: Is a savings account the best way to grow your money? |
Now, let’s shift our attention to the stock market and discuss if it is the right move for you!
With ‘trade wars’ and ‘negative interest rates’ — should I start playing the stock market?
Once you’ve built up a healthy savings account, which depending on your commitments might be anywhere from six to twelve months of your salary (and you’re well-insured), you may wonder what’s the next logical step to expand your wealth.
Perhaps news of impressive stock performance in 2019, as well as economic events like trade wars, inflated stocks, and negative interest rates have further piqued your interest to explore the prospect of investing in the stock market.
Now, while the stock market can yield handsome gains and will relatively trump savings accounts in maximum returns, it might not be for everyone.
And although the timing might seem right or tempting, with the markets’ supposed whopping gains, it does not immediately mean that you should take large sums of money from your savings and invest instead.
To help you make sense of the current economic climate and decide if it is indeed the right time to start investing in stocks, here’s a closer look at current market instabilities and how they relate to stocks and savings.
If the idea of trade wars leads to you to visualise stockpiling and increased demand that pushes up stock prices that would help you make a killing – think again.
Trade wars tend to have an overall declining effect on everything from the stock market to interest rates (which affect savings).
With that said, during times of economic uncertainties like trade wars, people tend to buy up safe-haven assets (things that are expected to keep value even in recessions) and that surge in demand drives up prices for assets like gold and the Yen (currency).
Still, conventional wisdom holds that a diversified portfolio is the only true hedge against volatile economies. Thus, starting to invest or buying into safe-haven asset classes probably shouldn’t be decided on the basis of trade wars alone.
Negative interest rates
When a country’s central bank imposes a negative interest rate, they do so to encourage borrowing and discourage savings.
With negative interest rates, banks essentially charge a very low rate for loans. And this may sound good, until you find out it also means that rates paid for savings account deposits are almost non-existent, which is the case in Japan.
Now, this might sound crazy; the point of negative interest rates was meant to stimulate the economy and make people spend more instead of hoarding their cash in a savings account – where they would theoretically lose money.
So you may be wondering, with negative interest rates should I still stick to a savings account?
This depends on where you plan to save. In countries that have imposed negative interest rates like Japan, Sweden, Switzerland, and Denmark, it may not be a wise move. The United States could impose a negative interest rate in the future, but it is difficult to predict if they ultimately will.
People who are dealing with negative interest rates tend to look for alternatives, e.g. stocks to grow finances. However, if you are saving your money in Singapore or in countries without a negative interest rate imposed, savings accounts are still a viable option.
The BIG question – Should you pull out a portion of your savings and invest in stocks?
The answer depends on your strengths and experience as an investor, your investment goals, your financial situation, and where you plan to invest.
The economic climate is currently volatile and this means that it can swing wildly in either direction. Again, market volatility leads to a decline in the long-term as it self-corrects. But in the short-term, investors can win or lose substantially.
Attempting to time the market is risky even for highly-trained professional investors.
Consider instead, that any time could be a good time to invest if you have prepared well e.g. researched the stock market, are financially secure, etc.
Thus, your decision to enter the stock market shouldn’t be based merely on trade wars, inflated stocks, and negative interest rates alone.
| See also: Top 4 Myths Singaporeans Believe About Stocks Investing |
Bear in mind: When making important money decisions, it’s a good idea to seek out the advice of licensed, trustworthy financial advisors.
While the stock market can potentially offer better returns than other vehicles and could allow you to earn passively, it isn’t for everyone. So before pulling out a substantial amount from your savings account to invest in the stock market, consider that you should first build up your savings, have sufficient insurance, understand basic financials, set realistic goals, and appreciate the risks associated with the stock market.