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
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.
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:
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.
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 particulars, amount to purchase and select your debiting account. Click Next.
- Verify your application details and click Submit to confirm your application.
- 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?
- It doesn’t require thousands of dollars. $500 is enough.
- High liquidity compared to fixed deposits and endowment plans.
- Interests beat fixed deposits and short-term endowment plans (occasionally, depending on the current month’s interest rate).
- Safe and protects our money against inflation.
- Suitable for all forms of savings, whether it is saving for a short-term goal or even retirement.
- Compared to a regular bank savings account, SSB doesn’t require us to fulfil any requirements (credit card spend etc)
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