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Use fixed deposits for emergency fund and war chest. (With a section on OCBC 360, UOB ONE and CIMB savings a/c.)

Monday, October 12, 2015

In a few blog posts and comments, I have mentioned how I like to park emergency funds and a portion of my war chest in fixed deposits. 

Fixed deposits offer higher interest rates than savings accounts and are liquid enough to be considered near money.

I have been asked before how I go about doing it and although I am pretty sure I have mentioned it before in my blog, I am not sure if I have done it clearly. Anyway, I guess I shall try to do a better job in this blog post.

EMERGENCY FUNDS

For emergency funds, first, we have to determine how much we need to have in order to maintain the lifestyle we currently have in the event that our income stream disappears. Then, set aside this money. (For my thoughts on how to determine how much we should put aside, please see related post no. 1 at the end of the blog post.)

If we have determined that $50,000 is what we need in our emergency fund, then, look for the best fixed deposit deals out there. 

Check what are the minimum amounts required by the different banks to qualify for special interest rates. If the minimum amount required is $25,000, then, split the $50,000 into two portions. In the event of an emergency, we could opt to break only one fixed deposit while the other fixed deposit continues to earn higher interest, for example.

Also, as interest rates are expected to rise in future, try not to lock the money in a fixed deposit for longer than 12 months unless the offer is compelling. 




What is compelling? 

Well, interest rates are expected by some experts to go up by another 0.5% or 0.75% by end of next year. So, we could use that as a guide as to how much more a 24 months fixed deposit should pay. For sure, otherwise, I wouldn't go for 24 months or 36 months fixed deposits.

Don't restrict ourselves to what is being offered by the three local banks. Often, the foreign banks offer higher interest rates for fixed deposits. If we can get relatively attractive interest rates for a 6 months or 9 months placement at these banks, why not?


WAR CHEST

What about money in our war chest?

I believe I mentioned before how I use the concept of laddering with fixed deposits. This is especially pertinent for the money in my war chest. 

The basic idea is to have one or two fixed deposits maturing every other month or so. This is to ensure that I will have more funds available regularly, more funds from maturing fixed deposits that will add to my regular income, passive or not.

These are funds which I could use to invest in opportunities if they presented themselves. Otherwise, the funds and regular income, if any, go into a new fixed deposit or two.



For example, I had two fixed deposits which matured earlier this month. I had thought to keep the money close to me in case the stock market should continue its decline from August. 

As the stock market seems to be recovering nicely, I decided to lock away some of the money in two new fixed deposits last weekend, one maturing in April 2016 and another one in July 2016.

Right now, I have 7 fixed deposits and they are maturing in December 2015, April 2016 (2x), May 2016, June 2016, July 2016 and November 2016. 

The chance that I might have to prematurely terminate one or a few of these fixed deposits still exists, of course, but with laddering, staggering the maturity dates, I hope I wouldn't have to. 

I would like to have my cake and eat it too. Who doesn't?

OCBC 360, UOB ONE & CIMB

I hope I do not have to prematurely terminate any of my fixed deposits and the likelihood is reduced by the good size float I maintain in OCBC 360, UOB ONE and CIMB savings accounts, all of which offer higher interest rates for our savings without any lock up period.



However, these accounts only pay higher interest rates on savings provided that certain conditions are met. 

The amounts that could benefit from higher interest rates are also capped at $60K for OCBC 360 and $50K for UOB ONE.

For people who have more than $110K in savings or who are unable or unwilling to jump through hoops to get the higher interest rates, they might want to consider making good use of fixed deposits since CIMB only pays 0.8% in interest although their latest offer, the CIMB Fast Saver, offers 1% in interest for the first $50K in savings and 0.6% for anything above that.


I want to conclude by saying that for those of us who are less disciplined, even if we had $110K or less in savings, it would make sense to park our emergency fund (and even our war chest) in fixed deposits and not in OCBC 360 or UOB ONE. Why?

Well, after all, money in fixed deposits is slightly farther away compared to money in a savings account. Fixed deposits have locks.

Related posts:
1. How much should we have in emergency fund?
2. A special chest for emergency fund.
3. Getting paid more while waiting for opportunities.
4. UOB ONE or (new) OCBC 360?

18 comments:

victorlsl1 said...

I don't believe in emergency funds. but if need to, the better thing to put in is to put in bank preference shares such as https://sg.finance.yahoo.com/q?s=MU7.SI which gives 4.7% twice a year or genting perpetual https://sg.finance.yahoo.com/news/genting-singapore-perpetual-bond-listed-000000888.html.

AK71 said...

Hi Victor,

Well, let's hope you never meet with an emergency which might force you to liquidate your investments at prices not of your own choosing.

For other readers' benefit:

MU7.SI is DBS Preference Share that has a 4.7% coupon. Note that the yield might not be 4.7%. It depends on the entry price.

As for perpetual bonds, regular readers would know that I wouldn't touch them in an environment of rising interest rates.

victorlsl1 said...

if we talk abt the DBS preference share, at any price, it still provides a return many times that of a FD. In a situation where the preference share cannot maintain a payout, is the FD that much safer? After all the FD has insurance only up to $50,000.

In a situation where this preference share has to be liquidated at a lower price, chances are the rest of the world wont be too good either.

AK71 said...

You missed my point. We can talk about cash flow but that is another topic.

In an emergency, we might need a large lump sum quite quickly. So, we might have to liquidate, in this case, the DBS NCPS and/or the perpetual bond.

Can we be confident that we would not lose money selling at any price Mr. Market might offer us at that point in time?

I think you could say that you don't have an emergency fund but to say that you don't believe in having an emergency fund boggles the mind.

victorlsl1 said...

If we are looking at "absolute" no loss, then your approach is slightly correct. The better way is to wrap in plastic and bury in the sand. However i feel that the DBS preference share is better from a risk/return approach. looking at the price history, how much "big" loss can it be? relative to the opportunity that you want to use the funds for.

While it sounds logical, how often do people actually set aside and activated the emergency fund and it was useful? maybe some of the readers can share their experience (if any).

I think setting aside the emergency fund as a fixed D is a big opportunity cost. I am not saying you are wrong and I am right. Just offering a different point of view.

AK71 said...

Nah. I wouldn't bury money in the ground. Someone actually did this in China and it was a tragedy. True story. ;p

Anyway, I think it might be a good idea to remind ourselves of the GFC which happened not too long ago and how stock prices plunged terribly. The stock market was, then, in the doldrums for many months. Many people also lost their jobs.

Imagine someone without an emergency fund who might have an emergency in those months. Imagine him liquidating his investments at a massive loss only to see the recovery in the stock market later on. Not a pretty thought.

Similar to buying insurance, we always hope that we do not have to draw on our emergency fund. We would rather not have emergencies in life.

Similar to buying insurance, there is a cost involved in maintaining an emergency fund.

Insurance and emergency funds are things we should have because things do go wrong like they sometimes do.

LetsGetRichTgt said...

Hi AK!
Hope your day is well :) How about SSB? Is that an option for you too? They can yield higher than FD if held 2 years or more.

AK71 said...

Hi LGRT,

I wrote a piece on the SSB before and why it is not for me:

Singapore Savings Bond: Good or not?

For someone who has $25K, he could get 1.5% p.a. in interest with a 6 months fixed deposit with SCB now. He doesn't have to lock the money up for 2 years.

For someone who has less, maybe, $5K or $10K, he could consider starting a Fast Saver account at CIMB and get 1% per annum without any lock up period.

blazingruby60 said...

hi AK

we didnt chat for a while. SSB maybe not but what do you think of Perennial retail bond offering 4.65 36 months lockup? quite reasonable u think? company maybe not as strong as capitaland but it wont like fold right..spook by sudden closure of late (bridal shop)..
cheers

AK71 said...

Hi blazingruby,

I think PREH and the bridal shop are worlds apart. ;p

Please see my latest blog post on PREH's bond. :)

Serendib said...

Hi AK71, I'm with you - an emergency fund is a must, especially when one has dependents. I split mine between CIMB savings (0.8%pa) and FD. My concern is that FDs are not as liquid - actually I've never broken one before, I can assume its something you cant do online or over the phone and requires a physical visit to the bank, which can be time consuming. So that's why I do keep a fair chunk of it in CIMB where the funds can be accessed via internet banking. I'm also considering putting some of it in SSB instead of FDs (once SSB rates get to north of 3% for 10 years). With ref to Victor's post on NCPS, these are way down in the creditor waterfall if things go south. When things go bad in banking, they tend to go very bad!

AK71 said...

Hi Serendib,

I have heard some horror stories from friends and family. I also witnessed a couple of situations where people who had no emergency funds had emergencies. I don't want to go there.

I have never had to break a FD before myself but it is good to know that the option is there. Yes, we have to make a visit to the bank to break a FD but once broken the money is ready for use. The liquidity is good compared to SSB which allows us to redeem at any time but the actual payment only happens on a pre-determined date once a month.

I agree that it is important to keep a float using savings accounts. I have some money in CIMB as well. Recently, I started a new account with Bank of China as they are running a promotion till end of the month. 1.775% p.a. if you open a savings account with them with $100K. The money is earmarked for 6 months like a FD. So, I shifted some of my float from CIMB to BOC. ;p

jojo said...

Hi AK,
some questions re SGD Fixed Deposit :-
(1) are we charged a penalty when breaking the FD before maturity? Understand Foreign Currency FDs charge a penalty for that.

(2) when breaking the FD before maturity, is the cash paid out to us in (a) principal amount only (ie prorated interest is forfeited), and (b) immediately on the day the FD is broken?

Thanks very much in advance. Regards,

AK71 said...

Hi jojo,

There usually isn't any penalty. We get back our money without any interest earned in the worst case.

The more enlightened banks could still pay some interest but based on the lower interest rate we get from a regular savings account.

Yes, we get our money on the same day the FD is prematurely terminated.

ED said...

Hi AK,
I have some questions on how you utilise your War Chest and how you top it up again.

Example:
If you bought a stock at $1.20 and soon after Mr. Market offers you the same stock at $1.00. You use your War Chest to pick up more shares of the same stock.

Question:
1. How much will you buy on the second round? Same value as the first entry? So that your average cost is now $1.10. Or same amount of money as the first entry? Meaning you're average cost price is much lower.

2. What will you do when the price goes back to $1.20? Sell the second trench? If yes, how much will you sell? All or just enough to top back up your War Chest? If no, how do you top up your War Chest again? Or should we, top up our War Chest again?

3. If Mr Market goes even more crazy and offer you a price below $1.00, how would you decide when to buy the third trench? Base on the original price of $1.20 (maybe $0.80, keeping the gap constant) or your new average of $1.10-(maybe $0.90, thinking that it cannot go any lower). And how much will you buy on the third purchase?

Maybe you can talk to yourself about this?

Best Regards,
Ed G.

AK71 said...

Hi Ed,

I don't want to share specifics because everyone's situation is different. We should find our own specifics. ;)

I have talked to myself in general before. To get an idea, you might want to read these two blog posts:

How much to invest? Nibbles and gobbles.

Position sizing, war chest, volatility, nibbles and gobbles.

YP said...

Hi AK

Wondering if you've looked at StanChart's e-saver? It's 1.4% p.a. for over $200k incremental balance. Usually, promotion lasts 2 months, e.g. current one ends 30 Nov and it's compared to your balance as of end-Sep. What I do is to open 2 e-saver accounts and toggle between the two. These 2-monthly promos have been ongoing for about a year now.

The hassle is that you have to withdraw the money to another account and then FAST transfer the amounts in from that 3rd party bank. This way, it would be considered as "new" money.

AK71 said...

Hi YP,

Yes, a friend told me about this. He actually has an account with Maybank that has a similar feature and he moves funds between the two accounts (i.e. Maybank and SCB) periodically.

I think if we don't mind the hassle, it is not a bad idea. ;)

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