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.

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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”

Understanding This One Concept Will Protect You from Going Bankrupt.

CASH FLOW

You’ve probably heard of the term ‘cash flow’, but don’t really know what it is. In layman’s term, cash flow is money flowing in and out of your bank accounts. Essentially, it’s subtracting your expenses from your income (salary + side income).

Cash flow into savings = Income – Expense

In this article, we will take a look at 3 different cash flow situations and how we can protect ourselves from bankruptcy.

1. Worst scenario

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The worst case scenario: Cash flow of some ‘wealthy’ people. Most of the time, they spend more than what they can afford. This is the worst case scenario because their savings are getting lesser as time passes. Eventually, they start borrowing money to pay the bills. Some even declare bankruptcy.

Just ask yourself: What would you do if you hit the jackpot and win a million dollars? If your answer is to buy a new sports car and/or upgrade your house while your monthly salary stays the same, I hate to break it to you but you have poor management of your cash flow. You are spending more than what you can afford. You may appear wealthy at the beginning because of this new lifestyle, but if it isn’t sustainable, slowly but surely, the one million dollars will deplete and you will end up in bankruptcy.

“The easiest way to avoid this situation is just to ensure your monthly cash flow is +++POSITIVE

And that’s it! It’s that simple, if you are spending less than what you earn, there is no way you will end up in a situation where you have to borrow money to pay your bills.

Here’s another question: Is an endowment or retirement savings plan considered an expense?

Ans: Some may argue that an endowment or retirement savings plan shouldn’t be counted as expenses. But if the sum of your loans, bills and savings plan still put you in this scenario, wouldn’t the resulting situation be the same?

2. Typical scenario

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“The typical scenario is to save what’s left from your expenses.”

A typical fresh graduate cash flow: With a take home salary of $2,800, you spend $2,400 on loans, bills and day-to-day expenses. Minus that and you save $400. It may seem like a huge leap from saving $1 a day during secondary school days, but is it really enough especially when we are living in the most expensive city in the world?

How much should I save then?

On the day I signed my employment contract, I asked myself: “How much should I save every month?”

I’m sure this is a very common question most of us can relate to. With many factors such as marriage, kids education, retirement etc to consider, we can never seem to hit the perfect number. If that sounds like you, chances are, you haven’t decided how much you need in the future and are just saving whatever is leftover from your expenses hoping it is sufficient for your future needs.

Taking the typical scenario of saving $400 a month – if we have a milestone ahead of us, let’s say getting married, given the median wedding fees of an average Singaporean which is $32,500, we need 81 months (6.8 years) to save that amount. Even if the fees are split between you and your future spouse, saving for marriage will still take approx 3.5 years. Bear in mind this is only for wedding! Now add in BTO, honeymoon and renovation costs….unless you are willing to settle for something less, saving $400/month may not be the ideal figure.

BE A GOAL DIGGER!

“Setting goals is the first step in turning the invisible into the visible” -Tony Robbins

I’ve done a simple calculation for us to estimate how much we should be saving each month to reach our goals.

Simple illustration

Below is a simple illustration on the expenses of an average Singaporean couple. This is a debatable topic as marriage costs vary for each individual. There are grants given to Singaporeans depending on their income and location of BTO. We also have the option of using our CPF to pay for our BTO. Thus, the actual numbers may deviate significantly based on the points above.

Assumptions:

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You can download the goals calculator for free here.

You may wish to add more columns as you need and the download button is at the top right corner (just in case you can’t find it). With this tool and a little Google magic, we’ll be able to have a general idea on how much we should be saving each month.

From this example, the ideal savings amount is $1,182/month. And to the large majority of us, saving $1,182 monthly isn’t a small sum. Thus, I couldn’t stress more on the importance of spending within our limits. Play around with the goals calculator and see what works best for you. Afterall, we do not wish to fall under the “Worst scenario” category.

Other considerations

If you’ve read my first article, you’ll know that my ultimate goal for us is to retire comfortably by building the five layers of wealth. The earlier we start, the better. Thus, you may wish to consider setting a goal for retirement.

Emergency funds are equally important as we’ll never know when we might lose our income due to unforseeable circumstances (recession, health issues etc). With that in mind, we would also want to build up our emergency funds for rainy days.

These topics will be covered very soon because they form the core of our savings layers.

3. Best scenario

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“Increase your cash flow by budgeting and/or earning more money”

By now, you should know how much savings you need but don’t know how to increase your cash flow.

There are 2 ways. Remember this formula?

Cash flow into savings = Income – Expense

Reducing our expenses, increasing our income or both, will increase our cash flow.

For example, cutting expenses by $800 and earning $500 additional income will increase our savings from $400 to $1,700. That’s an increase of 425%! This not only ensures we are on track towards our goals, we also have additional cash to build on our investment and passive income layers, better preparing us for retirement.

But how? The simplest solution is to gamble save through budgeting, finding ways to cut down on our expenses (credit card rebates, shopback etc) and/or finding additional income.

In summary, with proper management of our cash flow, we will be able to protect ourselves from going bankrupt and with goal settings, we are able to work towards an ideal cash flow situation.

Thanks for reading and happy building your layers.

 

*Featured image credits: Mick Stevens/The New Yorker Collection


If you’ve enjoyed this content, please share it around. Be notified when I publish a new article by clicking the subscribe via email button on the right. For those who prefer social media, you may follow me on Instagram, Facebook and Medium. If you also enjoy writing and sharing your ideas, I’m open to collaborations. Feel free to contact me here or at thefivelayers@gmail.com if you need help or have any questions.

Here’s how you can be a real life Crazy Rich Asian.

Dreaming to be a Crazy Rich Asian? Stop dreaming and start making it a reality. While most of my friends and colleagues are spending their time making a fuss about the high costs of living in Singapore, the wealthy have already planned their steps ahead. We may not be rich or crazy rich now, but with proper planning and execution, it certainly isn’t impossible.

First things first, we must define what being rich or crazy rich is. To me, being financially free is considered rich. Being financially free and able to afford branded goods is crazy rich.

This article will introduce the concept of The Five Layers, how to retire comfortably in Singapore and finally, being crazy rich.

Assumptions include:

  • Retiring at 65
  • Expenses at $3000/month equivalent to $36,000/year

1. Central Provident Fund (CPF)

For majority of us Singaporeans and Permanent Residents, whether we like it or not, CPF is mandatory. It is a social security system that requires both the employer and employee to contribute a certain amount for retirement, property and healthcare.

CPF

*Image taken from CPF website

Fun fact: Do you know your CPF account returns you an interest rate of up to 5% annually? Taking the rule of 72, it will take 14.4 years to double your amount!

Assuming we meet the Full Retirement Sum, we will be receiving a monthly payout of $1400/month starting 65 years old, almost half of the target of $3000! I will be sharing more about the tips and tricks to maximizing our CPF accounts in future posts.

2. Savings

There are two types of savings:

2.1 Saving money from budgeting and stretching your dollar.

Before we start saving, we should aim to be debt free first. That includes paying for our credit card loans and student loans because the interest rate from the banks could really hurt overtime.

interest

Assuming you took a student loan of $40,000 at 4.88% interest and the minimum monthly instalment is $400 every month, it will take 10 years to clear your student debts and you would have paid a total of ~$50,000. That’s a loss of $10,000! This is why financial experts usually advise people to first pay off their debts before investing.

Budgeting is important. Pay yourself first. By that I mean allocating a specific amount into your savings account once you receive your paycheck to clear your debts. I will be writing on how to allocate our money using a very simple strategy. Different ways and tools you can use to allocate and track your expenses. And if you are feeling adventurous enough, you may wish to follow my way of optimizing my budgets.

2.2 Saving by putting money in a savings account.

Savings-Account-2

*Image taken from Seedly.

Nothing beats the old fashion way of saving money by putting it in a bank account. But why put it in an ordinary savings account returning 0.05% interest when you should be getting 1% at the very minimum?

However, most banks require us to use their services such as crediting our salary, signing up for credit cards and meeting the minimum spend etc before we can enjoy these interest rates.

Let me ask you this question: How much are you saving if you were to spend $70 on a $100 item? The obvious answer is $30. But in actual fact, you just lost $70 because this amount could be saved for the future!

This is how minimum card spend works. So one might spend a few hundred dollars more on items or services they don’t need just to be eligible for credit cards cashback and monthly savings account interest.

I’m not discouraging credit cards. In fact, I have 3 credit cards because they are essential tools to help me maximize my savings. I will be writing on why I decide to make this decision and show you how powerful these cards can be when used correctly.

I will also be sharing my strategy to maximize my savings account and different ways you can approach based on your spending habits.

3. Long term investments

Unfortunately for 41% of Singaporeans, their wealth journey ends at point 2. So unless we can guarantee $384,000 in our account by 65, we will never hit the target sum of $3000/month (CPF+Savings). Not to mention that value is less inflation. The graph below shows a simple illustration on how much $384,000 is worth after 20 years.

inflation

With the average inflation rate in Singapore being 2.6%, the equivalent value of $384,000 would only be $226,730 at the end of 20 years. That means we can buy less things with $3000 after inflation. In fact, the true value would be around $2344 after 20 years.

Realistically speaking, unless the bank account we are using is able to equal the rate of inflation, the value of $3000/month will depreciate over time. Thus, we invest to beat inflation.

But but! Investment is risky and I might end up losing money instead!

Well, here’s another fun fact: Investing is only risky when you don’t know what you are doing.

spy2

*S&P 500 Index

If you purchased the S&P 500 index since its beginning in 1993, you would have made 537% returns today (August 2018), over a period of 25 years. That is about an annual return of 13.4%, beating inflation by more than 5 times every year! Before you get your hopes up, we must note that past performance is not indicative of future results, a more realistic expectation would be around 8% and I will share with you readers why in the near future.

As someone that only started investing this year, I do not have the wisdom and experience equivalent to the seasoned investors out there. However, there are really simple investing strategies which are almost guaranteed (99%) to beat inflation only on one condition: We must invest for the long term.

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Those who have upcoming big ticket purchases (renovation, kids’ education fees etc) and are unable to hold their positions in the stock market for long may consider getting bonds which almost guarantees a return of 1.75-2.97%.

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*Image from SGS (September’s 2018 bond)

With proper planning and execution, I’m confident that the first 3 layers are sufficient for an average Singaporean to retire comfortably.

4. Passive Income

Remember I talked about being a Crazy Rich Asian? Passive income is what separates the crazy rich from the middle-income. According to Wikipedia, passive income is defined as income resulting from cash flow received on a regular basis, requiring minimal to no effort by the recipient to maintain it.

I highly recommend the book “Rich Dad Poor Dad” by Robert Kiyosaki. It talks about managing our cash flow and finding assets that generate money. If you are too lazy to read, below is a summary of the entire book. And if you haven’t noticed, all the rich people have one thing in common: They all belong to the right side of the quadrant. Nick Young’s family owns many real estates. So yeah…you get the idea.

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*Image from The Norells

As the saying goes: “The rich gets richer, the poor gets poorer.” This is true because the rich are “Financial Free” as their passive income has surpassed their expenses. With that monetary security, they are not living life to make money. They are free to do what they want such as pursuing their photography or writing passion, traveling around the world, etc. Literally anything they want. For most crazy rich people, they would buy more real estates or start another business with the extra income they earn and in return, it increases their passive income. See below for a simple illustration.

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Realistically speaking, if you are just like me and have just started working, we shouldn’t be looking into businesses and real estate now. Not until at least we have saved enough emergency funds, be debt free and have a consistent amount of savings each month into our future goals account (BTO, Marriage, Kids education etc).

However, time is our greatest asset. We should aim to invest our time to learn new skills that improve our lives. If you have a particular skill or passion that is high in demand (Writing, design etc), you may want to consider doing freelance to earn additional income. I myself will be looking at taking advanced Microsoft excel course to improve my efficiency at work. To help you better understand, here’s a story.

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That’s the power of investing our time in things that bring value to us.

Did you know? If you are a Singaporean aged 25 and above, you are given $500 skillsfuture credit where you can sign up for approved courses to upgrade yourself? What’s best is most courses don’t cost much and you can enroll in them for free!

5. Trading

This is what I call the cherry on top of the cake.  A trader typically works 1-2 hours a day and on average, they earn about 20% of their revenue PER MONTH. But trading isn’t easy and comes with great risk. According to statistics, only 8% of traders are successful.  Speaking from someone that has tried trading, it requires discipline, consistency and most importantly of all, control of emotions. One may win 9 trades in a row but if he gets greedy on the 10th, he may lose all his earnings. Trading isn’t a one month or one year thing. You need to have a decent trading strategy, hopefully one that gives you a statistical advantage and stick with it. If you read about the law of averages, it states the supposed principle that future events are likely to turn out so that they balance any past deviation from a presumed average (Wikipedia). Eventually, your win/loss ratio will average out and you will start earning money. This is why casinos always make money no matter how much people play.

A simple rule: Don’t trade what you can’t afford to lose. If you think reading and watching online videos aren’t enough, there are many live workshops available.

Being a Crazy Rich Asian isn’t for everyone. But if you are willing to invest your time and money, it isn’t impossible to build your fourth and fifth layers. The road will not be smooth like butter. Expect to fail but more importantly, learn from your mistakes and don’t repeat it.

Lastly, thank you for taking the time to read my first article. If you’ve enjoyed it, please share it around. You may find me on Instagram, Facebook and Medium as well. I’ll continue to write more articles starting from where I began my Five Layers journey and hopefully, you will be able to follow my journey and start building your layers as well. If you need help to kick start your financial journey, please feel free to contact me. I’ll reply when I can.

Once again, thank you for reading and happy building your layers.

*Featured Image from Warner Bros