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A "foreign" chest for emergency funds.

Thursday, July 10, 2014

I wrote about the importance of having an emergency fund before and how it should be locked away. I also explained why I park my emergency fund in fixed deposits.

My preference has, thus far, been to park the money in UOB fixed deposits because I have a relationship with them and it is convenient for me. I simply have them deposit the principal plus interest into my UOB savings account upon maturity of the fixed deposits.

With the foreign banks, I have to tell them to send me a cheque (and make sure they do it) or to visit them to withdraw the money when the fixed deposit matures. So, although the foreign banks have been pretty aggressive in offering higher interest rates for fixed deposits, I didn't bother with them.

Apart from the perceived lack of convenience, was there any other reason why I didn't accept the many offers of higher interest rates from the foreign banks? Well, I just didn't think that the difference in returns is meaningful enough to compensate me for any inconvenience.

So, for example, Standard Chartered Bank is currently offering 1.25% interest per annum for a 15 months fixed deposit and 1.15% per annum for a 8 months deposit. This compared to 1.08% per annum for a 13 months deposit offered by UOB. The difference is 0.07% to 0.17% in interest rate per annum. Doesn't look like a big deal, right?

However, using the same argument I used before in comparing the interest rates for the CPF-SA and the CPF-OA, 0.07% is actually 6.48% more than 1.08% while 0.17% is 15.74% more!

So, although in absolute dollar terms, for a $100,000 fixed deposit, the difference over a one year period is only between $70.00 to $170.00 and does not look like a big deal, I convinced myself that it sufficiently compensates me for the effort to visit the bank upon maturity of the fixed deposit next year. For a bit of work, it is probably worth it.

Related post:
A special chest for emergency funds.

5 comments:

Angeline Chua said...

Thanks for sharing. Just a note for u in case u haven't heard of, that is, under the Deposit Insurance Scheme, the total amount that are guaranteed by government (SDIC) is only up to S$50k. Hence, IMO putting too much of your eggs in a basket can be risky in the event that the bank fails. Although we can never forecast it's failure, in essence, we have to spread out our investment. Again, this is just a pointer for every bank depositors in SG as I believe many are not aware of the assured amount. Some foreign banks are not covered under the scheme but apparently, I did see that UOB and SCB are members of SDIC.

AK71 said...

Hi Angeline,

Yup, that is correct. $50K. :)

Most of my funds are in UOB and also POSB. If these two banks go kaput, I think Singapore is well and truly sunk. :(

I am not as confident in the foreign banks though. -.-"

Angeline Chua said...

Absolutely. Every investors have their own risk tolerance and it is very subjective. And your fear for foreign banks are sound. Home grown banks are "safer" conceptually but that doesn't guarantee it's non-failing. Being the pillars of our financial market and a higher capital adequacy ratio than what's required, we can assume that these banks are fundamentally strong. Again, I agree with u that saving time on investment administration is one important aspect that most investors look for. Good luck!!

adrian said...

Hi AK,

Doesn't putting the war chest in fixed deposits of up to a year limit the liquidity of your funds to a certain extent? Especially when corrections in the market can happen in weeks or months.

Is the answer to divide up your war chest such that there will be fixed deposits maturing throughout the year?

AK71 said...

Hi Adrian,

Yup, you are right, of course. :)

Last night, I actually prepared a blog post on avoiding any deposits which will lock up our emergency funds or money in our war chests for too long. I just have to hit the publish button during lunch time. I do this a lot because I don't have time to blog in the day. ;p

The FD mentioned in this blog post is not my only FD. I have several. Different amounts. Different maturity dates. I also have a few FDs maturing on the same date. Basically, instead of putting, say, $100K in a single FD, I broke it up into 2 FDs of $50K each, for example.

So, in the event that I need the money, I only need to break a $50K FD instead of a $100K FD. :)

Breaking a FD means losing the higher interest rate. There isn't any punitive cost to pay.

In the meantime, we should have some money in our emergency fund and war chest which are in regular savings accounts or trading accounts for faster response. :)

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