Singapore Savings Bonds: A Practical Guide for Beginners

One question I’ve received after publishing The Newbie’s Guide to Budgeting is: “I tend to spend every dollar I see in my bank account, are there any alternatives where I can park my money so I can’t spend what I can’t see?” While there are many options available, the most indubious answer is to put our money somewhere with high liquidity (ability to withdraw anytime). This is especially important if we are saving for rainy days and/or any big purchases in the near future. In addition, according to a study by trading economics, the current annual core inflation in Singapore is 1.8%. Thus, to protect our capital from depreciating over time, we should look to park our money somewhere with high interest rates, preferably >1.8%.

Introducing Singapore Savings Bonds

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Image from Singapore Government Securities

What is a ‘Bond’

A bond is a fixed income investment in which an investor loans money to an entity (typically corporate or governmental) which borrows the funds for a defined period of time at a variable or fixed interest rate. Bonds are used by companies, municipalities, states and sovereign governments to raise money and finance a variety of projects and activities. Owners of bonds are debtholders, or creditors, of the issuer. -Investopedia

How Bonds Work

When companies or other entities need to raise money to finance new projects, maintain ongoing operations, or refinance existing debts, they may issue bonds directly to investors instead of obtaining loans from a bank. The indebted entity (issuer) issues a bond that contractually states the interest rate that will be paid and the time at which the loaned funds (bond principal) must be returned (maturity date). The interest rate, called the coupon rate or payment, is the return that bondholders earn for loaning their funds to the issuer. -Investopedia

In the case of Singapore Savings Bonds, the borrower is our Government and they pay the interest rate (coupons) every 6 months.

Is there any risk?

All bonds come with risks and they are measured with a Bond Credit Rating. SSB scores a rating of AAA for Moody’s, S&P, Fitch and R&I. According to the credit rating description, the obligor has an EXTREMELY STRONG capacity to meet its financial commitments. This means that the investment is EXTREMELY safe.

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SSB’s Credit Rating, Image from Singapore Government Securities

How does it work? What are the returns?

Every month, the SSB website is updated with the following month’s bonds (November 2018 will show December 2018 bonds etc). Interest rates change every month and you can purchase the bonds anytime within the application period stated on the website. Once your application is successful, the bonds will be credited to your CDP account on the following month. These bonds can be sold at any time in the event that you need money urgently, making SSB one of the best liquid assets to own.

As we hold the bond towards its maturity of 10 years, the interest steps up every year. Taking this month’s (November 2018) issue, i.e. applying December 2018 bonds:

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Dec 2018 Bonds, Image from Singapore Government Securities

As shown in the table above, the longer we hold the bonds, the higher the interest earned. The interest from 1 to 10 years is between 1.89% to 3.04%, with an annualized return of 2.57% after the maturity period of 10 years. That’s very impressive for a risk-free investment! For comparison, the guaranteed interest for short term (5 years) endowment plans issued by insurance firms ranges from 2% to 2.7%. Fixed deposit ranges from 1.4% to 1.9%. However, I must emphasize that SSB comes with no penalty should we withdraw before its maturity, making it a good place to store our cash for short term saving goals or in times of emergency.

Returns in dollars ($)

Taking this month’s bond for example: $10,000 invested in December 2018 bonds. Here’s how much we would’ve earned by Dec 2028.

Screenshot_6
Returns for $10,000 invested in December 2018 bonds
SSB Dec
You can calculate your potential returns using their interest calculator.

Keeping the bonds to maturity would earn us $2,592, about an average of $259 additional income every year!

A couple of notes: 

1. Yearly interest is credited into your bank account every 6 months, twice a year.
2. Interest is not compounded (You can read about compounding here), you cannot reinvest in the same Bonds but can choose to reinvest in new bonds by purchasing bonds for that current month yourself.
3. You can apply for SSB with a minimum of $500, and in multiples of $500. The total amount of Savings Bonds held across all issues cannot be more than $100,000.
4. There is a one time charge of $2 when you buy and sell bonds.
5. Once the bonds are applied and approved, the interests are locked-in. Application for the following month’s bonds does not affect any of the previous bonds.

Sounds great! How do I apply for Singapore Saving Bonds?

Step 1: Opening a Central Depository Acocunt

First of all, you need a Central Depository Account (CDP account). A CDP account is similar to a bank account. But it is for Equities (Stocks, ETFs etc) and fixed income instruments (Bonds, Treasuries etc). Singapore Savings Bonds you bought will be stored under your personal CDP account. Dollars and Sense has written a step by step guide on how to create a CDP account in Singapore.

Tip: You can create through the firm you are planning to open a brokerage account with. I created my CDP account through DBS vickers, killing two birds with one stone.

Step 2: Linking your bank account

Secondly, you would need a bank account with DBS/POSB, OCBC or UOB and the CDP account must be linked with the bank account through Direct Crediting Service (DCS). Now you are ready to apply for SSB!

Step 3: Applying for SSB

There are two ways, applying through ATM or Ibanking. Because I bank with DBS/POSB, and this is how their users can purchase SSB. (Credits to POSB website)

Applying through ATM:

  • Insert your ATM/Debit/Credit Card and key in your PIN.
  • Select More Services and your preferred Language.
  • Select ESA-IPO / Rights Appln/ Bonds /SSB/SGS/Investments.
  • Select SGS / Singapore Savings Bonds, followed by Singapore Savings Bond Application.
  • Confirm the on-screen T&Cs and select the Bond that you wish to apply for.
  • Verify the Bond Details and enter your Application Amount. Press Enter to proceed.
  • Select your Debiting Account.
  • Select your Nationality and verify that your CDP Account Number is correct.
  • Check through all details and select Confirm to submit your application.
  • Collect your Card and Receipt.

Applying through iBanking:

  • Log in to digibank Online with your User ID and PIN.
  • On the Top Menu, under Invest, click on Singapore Government Securities (SGS).
  • Select Singapore Savings Bonds Application and click Next.
  • Select the bond, tick to acknowledge the Agreement and click Next.
  • Enter your personal particularsamount to purchase and select your debiting account. Click Next.
  • Verify your application details and click Submit to confirm your application.

Note:

  • A non-refundable transaction fee of S$2 will be charged for each application request.
  • Application via digibank Online is only available on Monday to Saturday; 7:00am to 9:00pm (excluding public holidays).

    TLDR: Why should we apply for Singapore Saving Bonds?

    1. It doesn’t require thousands of dollars. $500 is enough.
    2. High liquidity compared to fixed deposits and endowment plans.
    3. Interests beat fixed deposits and short-term endowment plans (occasionally, depending on the current month’s interest rate).
    4. Safe and protects our money against inflation.
    5. Suitable for all forms of savings, whether it is saving for a short-term goal or even retirement.
    6. Compared to a regular bank savings account, SSB doesn’t require us to fulfil any requirements (credit card spend etc)

Conclusion

Singapore Savings Bonds is a safe alternative to put our hard earned money to work. Although the interest changes with each application period, it usually provides higher returns than most fixed deposit accounts and short-term endowment plans. In addition to higher interest rates, SSB is flexible and can be withdrawn at any time with no penalties. In my next article, I’ll show you a simple hack to maximize our savings using SSB. Thank you for reading and happy building your layers!

*Featured image from SGS

Continue reading “Singapore Savings Bonds: A Practical Guide for Beginners”

The Magic of Compounding

If you don’t earn much and can barely pay your expenses, the idea of saving is ludicrous as just saving $30 or 1% of your monthly income may seem small and irrelevant. The old me would rather indulge in a good meal at Chomp Chomp than to save it in my piggy bank. Why would I even bother?

Because Rome wasn’t built in a day.

Everyone, including myself, has to start somewhere. Small pieces of bricks put together will eventually form a fortress. Our financial situation will improve over time and even the smallest amount of savings will definitely benefit us over the long run. This is largely due to the power of compounding.

Compounding is the process in which an asset’s earnings, from either capital gains or interest, are reinvested to generate additional earnings over time. This growth, calculated using exponential functions, occurs because the investment will generate earnings from both its initial principal and the accumulated earnings from preceding periods. Compounding, therefore, differs from linear growth, where only the principal earns interest each period. -Investopedia

The Math Behind Compounding

Power of compounding proves that time is our greatest asset when it comes to building wealth. Here’s the mathematical breakdown on a fixed deposit account.

Formula (1)

For illustration purposes, let’s take $100,000 initial deposit with 5% annual interest and compare the differences between saving it for 5 to 40 years.

Screenshot_3 (2)

From the graph above, it’s shown that the 5-year growth increases with the number of years deposited, causing an exponential effect. This proves that the longer you let your money compound, the better. Which is why investors always like to say:

Time in the market is better than timing the market.

However, the above formula represents interest compounding at a continuous rate. Realistically speaking, interest doesn’t compound every day and second. A high interest savings account such as DBS multiplier compounds every month while an endowment plan offered by banks or insurance companies compounds 1-2 times a year. To put it into simple terms, the more times the interest money is credited annually, the better. A 2.5% interest savings account that credits twice a year is better than a 2.5% interest savings account that credits annually. So do remember this when you are considering two or more saving plans at similar interest rates!

Effect of increased compounding periods per year

interest (1).png

As you can see, having interest credited twice a year is definitely beneficial. Although the returns are small and negligible during the first few years, they could really ramp up over the long run and this difference would mean having an extra holiday with your family or not!

The actual formula for compounding is shown below:

FV = PV * [1 + (i / n)] (n * t), where:

  • FV = future value
  • PV = present value
  • i = the annual interest rate
  • n = the number of compounding periods per year
  • t = the number of years

Case study

Now that you know compounding is basically earning interest on interests and time is our greatest friend, let’s take a look at a typical scenario.

Johnathan and Mike have the same retirement goal of wanting to retire at 65 with $1,000,000. They both, however, led very different lifestyles. Johnathan is a smart saver and started saving $500 every month since the age of 25. Mike led an active lifestyle and was willing to double Johnathan’s savings when he hit 40 to compensate the loss in savings during his mid-20s. They both put their money in a portfolio which compounds yearly with an average return of 7%. Let’s take a look at their retirement accounts at 65.

mike vs johnathan (1)

Annual addition Years to grow Interest rate Compound
$6,000 Johnathan: 41 Mike: 26 7% 1 time annually
Total amount invested ($) Final amount ($)
Mike 312,000 881,806
Johnathan 246,000 1,377,793
Difference 66,000 -495,988
% Difference Mike invested 27% more Mike had 35% less

You must be wondering, how did Mike end up with 36% (496k) lesser than Johnathan despite saving 27% more? Ladies and gentlemen, this is the power of compounding! At 7% interest rate, taking the rule of 72, it takes roughly 10 years to double his capital. $6,000 would turn into $12,000, then $24,000 then $48,000 and finally $96,000 over 10, 20, 30 and 40 years. It was the final 1-2 doubles that really mattered and widened the gap between Johnathan and Mike.

“I’ll start saving next year”

Sounds familiar? Although there is little harm by delaying a few years, we could miss out on great returns the later we start. Here’s the graph showing Johnathan’s returns should he start at ages 25, 26, 27, 28 and 29.

savings at different age (2)

Age 25 to 26 26 to 27 27 to 28 28 to 29 Average
Difference ($) 96,136 89,847 83,969 78,476
Difference (%) 93.02% 92.99% 92.95% 92.92% 92.97%

On average, every year Johnathan delays reduces his potential returns by ~7%. Of course, this is not meant to scare any of you, but I hope these figures and graphs show you the importance of starting today. When people start to save, it often seems slow and pointless because things don’t change overnight. But as time passes, the rate of absolute change gets faster and faster and this is why the power of compounding is magical.

Before I finish, I would like to highlight that albeit the advantages of starting early, we should’t have a one-track mind and only focus on growing our wealth. If you’re like me and enjoy spending on movies, concerts and cafes, you don’t have to overly sacrifice your lifestyle just to lead the ‘suffer now, enjoy later’ life. Remember, progress is best made in a moderate and sustainable manner.

The future is unpredictable, so we should find a good balance between saving and spending. The best way is to set a goal and live within our budgets. I’ve covered this in my previous article: The Newbie’s Guide to Budgeting.

Lastly, if you don’t know how to find consistent returns on your savings and investments, my suggestion is to talk to your trusted financial adviser. I’m a huge fan of diversification and although I prefer to manage my own portfolio, I also feel the need to allocate a portion of my savings in a high growth investment plan. This protects me from the risk of losing all my savings if my investments were to turn ugly. If you are looking for an agent that comes from an investment banking background and managed to bring consistent returns for his clients, you may contact me at thefivelayers@gmail.com and I’ll link you up with him. Thank you for reading and happy building your layers.

The video below summarizes this article in two minutes.

*Featured image from Business insider

Continue reading “The Magic of Compounding”