Savings 101: Fixed deposit vs savings, step-up interest and bonus-tiered interest accounts
When it comes to investing our money, the old folk will always advocate fixed deposits. Why? Because they can weather through the most demanding and volatile market. They give higher interest rates and security compared to a traditional savings account.
However, one might notice that there are many types of savings account in the market these days that pay higher interest than the traditional savings account. They might even earn you more interest than a fixed deposit as long as you fulfill the criterias tied to it.
Global markets also carry a huge influence to fixed deposit interest rates. For example, the U.S. Federal Reserve announcing a raise in their rates could prompt a fluctuation.
That being said, a volatile market might prompt investors to seek safer investment options like fixed deposits, bonds, etc.
So when it comes to building your money nest, how do you decide between fixed deposits as another savings instrument on top of saving money in the bank savings account? Let us help you understand the difference between fixed deposits and savings account.
|Type of account||Fixed Deposit||Savings Account||Step-Up Interest Account||Bonus-Tiered Account|
|Minimum initial deposit||As low as $1,000||As low as $0||As low as $0||As low as $0|
|Tenure of deposit||1-month to 60-months||N/A||N/A||N/A|
|Base interest||Up to 0.1%||Starts from 0.05%||Starts from 0.01%||Starts from 0.05%|
|Bonus interest||N/A||N/A||Up to 2% (inclusive of base interest)||Up to 4.08% (inclusive of base interest)|
|Criteria to fulfill||N/A||N/A||GIRO a monthly fixed amount to the bank, Increase minimum balance each month, etc.||Salary crediting, Credit card spend, Invest or insure, Minimum number of transaction per month, GIRO bills payment, etc.|
|Average monthly balance||N/A||$0 - $5,000||$0 - $20,000||$0 - $3,000|
|Monthly fall-below fee||N/A||$0 - $2||$2 - $15||$0 - $5|
|Accessibility of your funds||Not accessible||Very accessible||Very accessible||Very accessible|
|Applicable for those||Who have a lump sum of liquid funds to invest for short term to gain higher interest rates or waiting out for better investment opportunities||Who use it for everyday banking||Who use it to earn better interest rates with minimal criteria to fulfill like Bonus Tiered Interest Account||Who use it to consolidate their savings and expenditure for better financial management while receiving higher interest rates|
|Examples||Maybank iSAVvy Time Deposit, Standard Chartered SGD Time Deposit, UOB Singapore Dollar Fixed Deposit||CIMB StarSaver, UOB Stash Account, POSB SAYE Account, Standard Chartered e$aver Account||Citibank Step-Up Account, OCBC Monthly Savings Account, DBS Be Your Own Boss (BYOB) Account||OCBC 360 Account, UOB ONE Account, BOC SmartSaver|
What is a Fixed Deposit?
A fixed deposit (used interchangeably with time deposit) is a type of deposit account where you place a sum of money for a stated period of time (tenure) and a fixed interest rate is paid at the end of that period. It is a form of investment but a safer investment option when compared to other investment types such as shares or even the trading market.
The good thing about a fixed deposit is the guaranteed yield on your funds upon maturity, and you can choose to deposit from 1-month all the way to 36-months for most banks, some up to 60-months. The longer your tenure and the higher the deposit amount, the better your returns. You can also open more than one fixed deposit account simultaneously.
The downside? Your fund gets locked down during the term before maturity and you cannot withdraw it. Well, you could but only if you do not mind forgoing the interest payable.
However, certain fixed deposits allow premature withdrawal after a particular tenure. That means that you can withdraw your funds at a fixed time, perhaps at the sixth month of your one-year tenure. Depending on when you make the withdrawal, you might be entitled to a pro-rated interest.
For example, Peter places $50,000 into a fixed deposit for 3 months at an interest rate of 1.2% per annum. His interest would work out to be $150 ($50,000 * (1.2% / 4)).
How to amplify your returns with Fixed Deposits
If you have the need for foreign currencies, most banks offer fixed deposits in a multitude of foreign currencies. Typical available currencies are USD, GBP, AUD, NZD, EUR, CAD, RMB, etc. This provides you with exposure to your chosen foreign currency and allows you to earn potentially higher rates compared to SGD deposits.
Of course, there are bound to be some inherent risks such as foreign exchange risk, where you might incur losses in exchange rates or be subjected to losses due to a country's political situational change. You might also be subjected to premature uplift handling fee, etc.
What is a Savings Account?
A bank savings account (commonly known as Passbook Savings or Statement Savings in Singapore) is an account that you hold with a bank or financial institution to place your funds and they pay you a
modest pathetic interest rate. A basic savings account generally pays an interest rate of 0.05% to 0.8% per annum for the base tier in most banks. Certain banks might pay up to 1.0% per annum.
A savings account is typically used to hold your funds as you save over the short or long term for general or specific purposes. It is also a transactional account where you can withdraw funds for daily use.
If you travel often and need a sizeable and diverse amount of foreign currency, you can consider saving in a multi-currency savings account that pays up to 1.70% per annum, depending on the currency. This would allow you to access your money via ATMs while overseas with no additional processing fee. An example would be banks accounts like Citibank Global Foreign Currency Account. Watch out for the foreign exchange risk though.
But beware, some banks might charge a Fall Below Service Fee for not maintaining a certain average balance in the savings account. Depending on the bank or type of account, the Average Monthly Balance or Minimum Average Daily Balance ranges between $500 - $5,000.
While the Fall Below Service Fee typically starts from $2 onwards, some banks do not charge this fee as they do not have a minimum sum for you to maintain.
Amplify your returns with Step-Up Interest account
You may notice that apart from the basic savings accounts, there are accounts that award you with extra interest for certain behaviours such as growing your account balances. For example, the Citibank Step-Up Account rewards you with bonus interest as long as you transfer a fixed saving amount into the account.
The rise of "Bonus-Tiered Interest" account
Most banks are also competing in the market with "Bonus-Tiered Interest" accounts, where you can earn additional interest by paying bills online, spending on the bank's credit card, buying an insurance or investment product and so on. This makes it attractive for us to save even more with such accounts.
You might have heard of the OCBC 360 or UOB ONE accounts. These accounts are great savings tools as they provide much higher guaranteed interest (provided you meet the bonus interest criteria) ranging from 1.55% - 4.05% per annum, as compared to the basic accounts.
In fact, some of these accounts are checking accounts, which are essentially "savings account" that allows you to write cheque but they generally do not even pay you a modest interest rate. Such accounts generally are good for business owners who need to issue cheques for business usage.
As much as it is good to have these bonus-tiered interest accounts, some people will find it cumbersome to have it mainly due to the multiple criteria (e.g. salary crediting, credit card spend, bill payments, etc.) to fulfill to earn that extra interest.
You'll also have to deal with the hassle of setting up all your payment instructions like relinking your GIRO for phone bills, informing your HR on the change of your salary crediting account, etc.
One thing to look out for between such accounts is the cap to how much deposit will be applied with the bonus interest, e.g. OCBC 360 account holders will receive the bonus interest on the average daily balance up to the first $70,000 in the account while Standard Chartered Bonus$aver account holders will receive the bonus interest up to the first $100,000 in the account.
It is always good to compare such accounts based on their criteria to see what you can meet based on your lifestyle spending, salary, etc. and which bank pays better interest.
Am I protected if the bank collapses?
Set your mind at ease, because both savings accounts and fixed deposit are protected by the Deposit Insurance Scheme. Essentially, any banks or finance company under this scheme will safeguard your eligible accounts, all of which are aggregated and insured up to $50,000. Major, well-established banks in Singapore are under this scheme, so you are well-protected should anything happen.
A GoBear tip
Consider the pros and cons of each financial instrument, your savings purpose and tenure to make an informed decision for yourself. Although the interest returns may be much lower than a stock investment, they bring a much-needed security for your financial assets.
In short, always ensure you have some form of diversification in your investment portfolio.
We Bear some great advice on personal finance