Growing up, the first bit of financial advice our parents gave us was probably to save money – and as much of it as possible for a rainy day.
As grown-ups, we go to work, try to climb the corporate ladder and each month, sock away a percentage of our salary in a savings account. This all sounds great, until you realise that while you’ve been hard at work, the money in your bank account has been collecting digital dust – especially over the past year when interest rates have plunged.
The dangers of sitting in idle cash
Idle cash as its name suggests, is cash that is not meaningfully earning you any interest or investment income.
To put things in context, consider this. According to an analysis by Goldman Sachs, the S&P 500 has returned 13.6% annually over the past 10 years. If you invested $10,000 in 2010 – and added nothing else, you would have had close to $36,000 in 2020. But if you had kept that money in a basic savings account with 0.05% annual interest, you would only have earned an extra $50 after 10 years.
With average yearly inflation at 2% in Singapore, that would have meant you lost purchasing power. The value of your original $10,000 savings would have been eroded by inflation, meaning that it would eventually only buy $9,800 worth of things, then $9,600, and so on.
If you think that’s bad, consider the opportunity cost of keeping cash that you could otherwise have invested to earn more. By staying invested from 2010 to 2020, you could have more than tripled your money.
Managing cash in a low-interest environment
While investing your cash can give you potentially better returns, this does not mean you should funnel all your money into investments. On the contrary, it is still important for most people to maintain a cash buffer that’s easily accessible, aka your emergency fund.
Should you be laid off, or run into a medical emergency, the cash in your emergency fund can be quickly tapped into to cover any unexpected costs without you having to incur extra debt. This helps you keep your finances in good shape even as you search for a new job or spend time recuperating.
Instead of keeping your emergency fund in a basic savings account, better options for your cash would be high-yield savings accounts or cash management accounts such as Syfe’s Cash+ portfolio. The Syfe Cash+ account gives you a projected return of 1.5% per annum – with no lock-ups, no minimum investment, and no need to meet any qualifying criteria such as salary credits.
With worldwide interest rates at near zero, even high-yield savings accounts now offer yields of just 0.05% to 1.0% per annum (based on the popular DBS Multiplier account assuming you fulfill one income and two category transactions below $30,000, and applicable only on the first $50,000 balance in the account).
If you would rather not jump through multiple hoops just for paltry interest rates, consider Syfe Cash+ as an alternative. You get to earn a projected return of 1.5% p.a. while enjoying the flexibility of transferring and withdrawing funds anytime at no cost.
Putting your surplus cash to work
Typically, experts recommend setting aside about 3 to 6 months’ worth of living expenses as your emergency cash reserves. To make the most of this money, you can park them in an account like Syfe Cash+.
Once you’ve settled your emergency fund, you can then determine how much of your surplus savings can be invested over a longer duration. Remember, the sooner you start investing, the more time your money has to grow due to the magic of compounding returns.
Not sure where to start? Explore Syfe’s range of investment portfolios here. If your aim is to build a passive income stream, you can consider Syfe’s REIT+ portfolio which tracks the SGX iEdge S-REIT Leaders Index. If you’re comfortable with risk and want the potential for higher returns, Syfe’s Equity100 portfolio offers 100% exposure to global equities.
Ultimately, keeping all your money in the bank is a missed opportunity. Your emergency fund deserves a smarter home, just as your surplus cash should be invested to hedge against inflation and help you keep building wealth.