It's amazing that, with the advent of Singapore Savings Bonds (SSBs), people are still choosing to put money in fixed deposits. It seems finance is one of the rare industries where novelty is a disadvantage - when it's new, no one wants to try it. But there are plenty of reasons not to shy away from SSBs:
What are SSBs?
SSBs are a form of government bond. They are available to Singaporeans 18 years old or above, and have a maturity period of 10 years. The coupon (interest rate) on SSBs rises every year - at the end of 10 years, you would have earned an annual interest similar to if you had invested in a 10 year Singapore Government Securities (SGS) bond.
This is usually between two to three per cent per annum.
SSBs can be purchased at DBS/POSB, OCBC, or UOB banks. You can buy them through ATMs.
SSBs are superior to fixed deposits in almost every way.
If you need to stash your money somewhere for a long time, SSBs beat fixed deposits because:
- SSBs offer more flexibility
- SSBs pay a higher rate of interest
- SSBs require a lower initial sum
- Fixed deposits are not any safer than SSBs
1. SSBs offer more flexibility
With most fixed deposits, you can't pull your money out before a fixed period (hence the name). If the money is in a fixed deposit for 10 years, it has to stay completely untouched for 10 years.
If you do withdraw the money, you will usually lose the accrued interest. For some banks, there may be a penalty on top of that. This can hurt quite a bit: if you've parked the money in a fixed deposit for nine years, and an emergency makes you withdraw the cash, you would have lost all the interest accrued for almost a decade.
SSBs however, let you cash out and run on any month, without losing the accrued interest. That flexibility alone should justify choosing it over fixed deposits.
When looking at long term periods like 10 years or more, flexibility is critical. A lot can happen in that time (e.g. if you are 25 years old, you may be getting married before you hit 35, and require a large amount of money).
2. SSBs pay a higher rate of interest
Even if you only hold a SSB for one year, assuming SGS rates of around 2.4 per cent, you would still get returns of around 0.7 to 0.9 per cent. This is on par with most fixed deposit options (fixed deposits rarely exceed 0.8 per cent).
Over 10 years, SSBs can provide returns of between two to three per cent (depending on how SGS rates fare), which significantly beats fixed deposits.
3. SSBs require a lower initial sum
Most of the good fixed deposit options require you to put down sums of $5,000 or $10,000.
(There are some fixed deposits that will accept less, but these lower-end fixed deposits may have interest rates below even half a per cent. Along with inflation, the accrued interest will buy you maybe a half-eaten char siew pau in 10 years).
That can be a big sum to commit, and remember: it's locked up for five to 10 years.
SSBs can be bought for as low as $500, to a maximum of $50,000 per person per bond issue (and up to $100,000 total across all issues). This makes it a better alternative if you are just starting out in the workforce, or on a tight income at the moment.
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4. Fixed deposits are not any safer than SSBs
It's improbable that banks are "safer" than the Singapore government.
In fact, if a day comes when the Singapore government can't repay its loans - a scenario with about the same odds as your dog learning to make you a full breakfast - the banks will probably be crashing and burning as well.
And while it's true that the rate on SGS can fall, even a return of two per cent per annum will still beat the highest fixed deposits.
SSBs offer a greater or equal amount of security as banks, along with higher interest and more flexibility. The decision to use them instead of the bank is something of a no-brainer.
The Fifth's perspective
But note that SSBs are not investment products, or comparable to corporate bonds. SSBs should not be compared to corporate bonds, as they cannot be sold on a secondary market. SSBs are for holding your savings. They are not good for investing. The returns are too low for purposes such as a retirement fund.
As a rule of thumb, investors should try to beat the annual rate of inflation by at least two per cent. In Singapore (and most developed countries), this means a viable investment should provide consistent returns of around five per cent per annum.
If you are looking for investments to grow your money, then check out this four-step formula instead.
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