Should I keep my money in the bank?

10 Sep 2013 
SOURCE: Peter Lim
This question has been surfaced to me numerous times by the people around me, and so I thought that I’d share my thoughts with you here.

Frankly speaking, there is no right or wrong answer. It’s simply about the timing and purpose. Purpose: I will normally advise people to keep cash when they have immediate short term goals to fulfill. This can come in the form of a wedding or renovation costs for a new house. Other than that, one would just need to have up to 6 months of emergency liquid cash on hand and the rest can be invested should the individual wish to.

Timing: If you foresee any major life event that might require spending, and wish to plan ahead, the individual can save up for that event. Again, after the event has passed there is no need to put ALL of your funds inside the bank.

One needs to analyse the opportunity cost of placing your cash in the bank. How much interest is your local bank offering you? Your interest earnings per year is likely not even enough to pay for one cup of tea at your local cafe. With this in mind, why would you still want to put money in the bank? Is it less risky? Is your principal sum guaranteed?

One also needs to bear in mind that in actuality, your funds in the bank are losing value every year because the rate of inflation is higher than the bank’s interest rate offered to you. Singapore’s current inflation rate stands between 3-4% and most banks are offering less than 0.5% interest. Doing the math, you are in fact losing up to 2.5-3.5% every year when you are “saving” with the bank. Placing all your spare funds in the bank, then doesn’t seem like such a feasible idea.

To maximise your returns, one should always look at diversifying your portfolio.

Am I better off placing my money into investments then? Simple financial instruments such as Exchange Traded Funds (ETF), Real Estate Investment Trust (REITS) or even Unit Trusts can potentially bring you higher returns. Yes, the rate of returns is not guaranteed but at the very least, you are attempting to stop a leakage in your portfolio (inflation). A word of caution is to always understand the financial products you are utilising, and to ensure that it fits your risk profile before taking a plunge.

With this mindset, doesn’t it make more sense for you to invest your excess fund as opposed to keeping it in the bank? Even if you say that you are not investment savvy, and am adverse to risks, there are lower risk investment products that you can utilise. This may come in the form of bonds, or endowment plans which can help cater for your retirement.

Always remember that old age and poverty will not ring you up to inform that they are coming. They will instead slowly creep into your life and eat you up. Therefore, make a choice to embrace these changes and live your old age with STYLE! To do that, you need to practise savvy money habits. :)

I hope my sharing has stirred you to think twice about putting all your liquid funds with the banks and consider your other options.

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