A "foreign" chest for emergency funds.

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.

A new flat on the way and $200K in spare cash.

She and her husband have some $200K in spare cash. She is in her 20s and they have a new flat on the way. This is my reply to questions posed by her:

Hi YX,

Firstly, please remember that I am not giving advice. However, I can share what I would do given the same set of circumstances. :)

1. I would take a 30 year housing loan instead of 10 years even though I might have the ability to pay it off at one go. It is less of a burden in case bad things should happen. If I had more spare cash over time, there is the option to pay down the loan, doing partial capital repayments.

2. I would invest some of my spare cash for higher returns. This would make sense as long as the returns are higher than the interest payments on the housing loans, all else remaining equal. If interest rates go sky high, then, it would be time to pay down the loan. Some of the spare cash goes into an emergency fund and the rest goes into a war chest, waiting for investment opportunities.

3. I don't think it is a good time to be in bonds. Higher interest rates on the horizon make bonds a bad investment now, I feel. Cash, we always need to have. Doesn't matter that the banks pay peanuts for our savings. Gold is an insurance and conventional wisdom says we should have 5 to 10% of our wealth in precious metals. However, it doesn't generate income.

My approach is about having stronger cash flow while keeping necessary debt manageable, if any at all. Also, we always need liquidity and insurance in life. Why? Because bad things happen in life. As long as we are prudent in our finances, always saving some money and investing for income, we will do well over time. :)

Best wishes,
AK

If you have any ideas which you would like to share, please do so in the comments section. I am sure a meaningful discussion would be appreciated.

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2. InvestX Congress: Q&A (some relevant questions).
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4. Buying an apartment. (See point 2)
5. Young working Singaporeans, you are OK?