Why fixed deposits over structured deposits?

Recently, I came across offers from two banks to place money in structured deposits offering higher returns than fixed deposits. 

The promised returns were approximately 1.45% to 1.85% per annum in return for the funds being locked up for 4 to 6 years.





I was NOT attracted by these offers because:

1. Whether this money is a part of my emergency fund or my war chest, in the event that I need to use the money during the lock up period, there will be punitive costs which I have to bear.

2. To avoid these costs, once in, the only option is to stay with the product till maturity. 

A time period of 4 to 6 years is relatively long and there is a good chance that opportunities might come knocking during that time.






3. There are many offers of promotional interest rates for fixed deposits by banks here and I recently placed some money in a 15 months fixed deposit for an interest rate of 1.25% per annum. 

Being offered only 0.2% to 0.6% higher interest rate per annum in return for a 4 to 6 years lock up period seems inadequate to me.

4. With fixed deposits, there are no punitive costs to bear (except to lose the higher interest rate) if I should have need for early withdrawal.





Whether it is money in my emergency fund or money in my war chest, 12 months fixed deposits (give or take a few months) with "promotional" interest rates are good enough for me to park a large portion of the money. 

The rest of the money should be retained in my savings and trading accounts to meet short term needs and to react more quickly to emergencies and opportunities.





Structured deposits could be a good thing for some savers but unless the lock up period is much shorter while retaining higher interest rates compared to 12 months fixed deposits I doubt it is a good thing for investors.






Related posts:
1. A special chest for emergency funds.
2. A "foreign" chest for emergency funds.

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.

Related posts:
1. Gear up and receive more passive income.
2. InvestX Congress: Q&A (some relevant questions).
3. What should I do when I am down 25%?
4. Buying an apartment. (See point 2)
5. Young working Singaporeans, you are OK?

CheapOair means more options for cheap travel deals.

CheapOair. The name gives me the impression that it is a place to find cheap air tickets.

A friend's dad told me about them recently and, quite coincidentally, while checking my messages over the weekend, I found a pending offer from them to become an affiliate. Get good deals and maybe make some pocket money by spreading the word? Sounds like a fair enough proposition. I decided to check it out. Link:

Book Cheap Air tickets with CheapOair & Save Big on Travel.

I searched for air tickets to Osaka for the month of August and was offered a round trip ticket from US$499.00. Not bad.

What about Melbourne? Lowest fare was US$478.00 by AIR ASIA X.

Remember what I said about ZUJI (ZUJI Flights Home Page) before, we want to buy only when we get good value for money. There is no guarantee that CheapOair will get us the lowest prices for air tickets but having one more option for comparison guarantees a higher chance of getting a good deal.

If you get a good deal using the text link above, AK gets a small commission:

Win-win. Kamsiah you. Yeah!

Related posts:
1. Macarons from ZUJI.
2. Planning to travel? Check out ZUJI.