Despite plenty of better options, many
Singaporeans are still stuck with fixed deposits. Some of us are
plagued with a “winning by not losing” mentality, where we think
hoarding the money is safest. Nothing could be further from the
truth. In fact, those who hoard rather than invest are the ones
living on the edge.
with just cramming money in accounts?
The simple answer is inflation. Over
time, the cost of goods will increase. To get a sense of this, you
can try out the inflation
calculator that the Monetary Authority of Singapore (MAS) has on
their website; but here’s an example for you:
A three-room flat priced at $200,000 in
1990, would cost around $352,640 in 2015. This is a 76 percent
increase over 25 years, at an interest rate of around 2.29 percent.
Now if you have had kept $200,000 in a
Milo tin in 1990, and waited till 2015, the money would not have
magically decreased – the numbers printed on it would not get any
smaller. However, because the supply of money in Singapore has
increased, the $200,000 no longer has the same real value. It
does not buy the same number of goods it used to.
So while your $200,000 may have gotten
you a three-room flat in 1990, you’d be around $152,000 short if
you tried to buy one last year.
Alternatively, you can work backwards.
If you are old enough to remember the 1980s, for example, you will
remember when fast food meals (entire sets, with fries and toys and
all) were around $2. You might also recall that cab rides from Jurong
to Changi could be under $12, and that music wasn’t rubbish.
The point is, everything you buy –
from food to clothes to education and healthcare – tends to rise in
price over time.
How much more
expensive do things get?
The rate of inflation is regularly
monitored, in the form of the Consumer Price Index (CPI). An
alternative measure is core inflation (core inflation excludes the
price of housing and private transport).
The inflation rate is like a
speedometer: it moves up and down every day, as inflation or
deflation is a little unpredictable. But for the most part, it’s
safe to assume an inflation rate of about three percent in most
developed countries, including Singapore.
(For reasons that can literally bore
you into a coma, most central banks aim for an inflation rate of
three percent. It’s a healthy figure that suggests economic growth,
without being too high to manage).
If you intend to retire in a “cheaper”
country by the way, like Malaysia or the Philippines, do note that
inflation in such developing countries is often in the double
digits. That’s because they’re growing, and it is important
to plan your retirement accordingly.
Can your bank
account cope with the rate of inflation?
In a word, no.
The typical fixed deposit (unless you
are very rich and have access to a private bank) grows at under one
per cent per annum. A current account has an interest rate of around
0.125 percent, or sometimes just zero, because why even bother at
Assuming inflation of three per cent,
it means that every year you keep your money in a fixed deposit, you
are effectively “losing” around 2.2 per cent.
A safe retirement fund is one that can
beat the rate of inflation by two percent (around five
percent per annum). This is why your CPF
Special Account and Medisave Account are meant to yield up to five
percent interest (including the extra one percent interest paid on
the first $60,000 of your combined balances).
By those standards though, your bank
account is about as helpful as a three-legged horse in an F1 race.
What can you
do about it?
There are a number of simple investment
strategies that can produce five per cent per annum. For
example, Singapore REITs have an average
dividend yield of around seven percent. If you’re interested
investing in REITs for dividends, here’s how you can identify the
The Straits Times Index Fund has also
made an annualised
return of 6.94 percent since its inception in 2002 (although its
performance has fallen of late, and is likely to be lower in the near
future). But it’s clearly not impossible to beat inflation.
Even investing in Singapore
Savings Bonds (around two to three percent interest per annum
over 10 years) puts you in a better position compared to fixed
should go in a bank account?
Gold and jewellery should go into
safety deposit boxes because most home insurance only pays out
$2,500 per article (up to a cap of $5,000) stolen or damaged. That’s
a useful type of bank deposit.
The other thing that should go into
bank accounts is savings, not investments. You
should gradually hoard up to six months of your income in a bank
account, and then put the rest in investments.
This money is kept within arm’s
reach, for fast and easy payment. Even then, you might want to
consider Singapore Savings Bonds (SSBs) for this, as they allow you
to cash out every month and have a better interest rate.
This article first appeared on TheFifthPerson.