In a few blog posts and comments, I have mentioned how I like to park emergency funds and a portion of my war chest in fixed deposits.
Fixed deposits offer higher interest rates than savings accounts and are liquid enough to be considered near money.
I have been asked before how I go about doing it and although I am pretty sure I have mentioned it before in my blog, I am not sure if I have done it clearly. Anyway, I guess I shall try to do a better job in this blog post.
For emergency funds, first, we have to determine how much we need to have in order to maintain the lifestyle we currently have in the event that our income stream disappears. Then, set aside this money. (For my thoughts on how to determine how much we should put aside, please see related post no. 1 at the end of the blog post.)
If we have determined that $50,000 is what we need in our emergency fund, then, look for the best fixed deposit deals out there.
Check what are the minimum amounts required by the different banks to qualify for special interest rates. If the minimum amount required is $25,000, then, split the $50,000 into two portions. In the event of an emergency, we could opt to break only one fixed deposit while the other fixed deposit continues to earn higher interest, for example.
Also, as interest rates are expected to rise in future, try not to lock the money in a fixed deposit for longer than 12 months unless the offer is compelling.
What is compelling?
Well, interest rates are expected by some experts to go up by another 0.5% or 0.75% by end of next year. So, we could use that as a guide as to how much more a 24 months fixed deposit should pay. For sure, otherwise, I wouldn't go for 24 months or 36 months fixed deposits.
Don't restrict ourselves to what is being offered by the three local banks. Often, the foreign banks offer higher interest rates for fixed deposits. If we can get relatively attractive interest rates for a 6 months or 9 months placement at these banks, why not?
What about money in our war chest?
I believe I mentioned before how I use the concept of laddering with fixed deposits. This is especially pertinent for the money in my war chest.
The basic idea is to have one or two fixed deposits maturing every other month or so. This is to ensure that I will have more funds available regularly, more funds from maturing fixed deposits that will add to my regular income, passive or not.
These are funds which I could use to invest in opportunities if they presented themselves. Otherwise, the funds and regular income, if any, go into a new fixed deposit or two.
For example, I had two fixed deposits which matured earlier this month. I had thought to keep the money close to me in case the stock market should continue its decline from August.
As the stock market seems to be recovering nicely, I decided to lock away some of the money in two new fixed deposits last weekend, one maturing in April 2016 and another one in July 2016.
Right now, I have 7 fixed deposits and they are maturing in December 2015, April 2016 (2x), May 2016, June 2016, July 2016 and November 2016.
The chance that I might have to prematurely terminate one or a few of these fixed deposits still exists, of course, but with laddering, staggering the maturity dates, I hope I wouldn't have to.
I would like to have my cake and eat it too. Who doesn't?
OCBC 360, UOB ONE & CIMB
I hope I do not have to prematurely terminate any of my fixed deposits and the likelihood is reduced by the good size float I maintain in OCBC 360, UOB ONE and CIMB savings accounts, all of which offer higher interest rates for our savings without any lock up period.
However, these accounts only pay higher interest rates on savings provided that certain conditions are met.
The amounts that could benefit from higher interest rates are also capped at $60K for OCBC 360 and $50K for UOB ONE.
For people who have more than $110K in savings or who are unable or unwilling to jump through hoops to get the higher interest rates, they might want to consider making good use of fixed deposits since CIMB only pays 0.8% in interest although their latest offer, the CIMB Fast Saver, offers 1% in interest for the first $50K in savings and 0.6% for anything above that.
I want to conclude by saying that for those of us who are less disciplined, even if we had $110K or less in savings, it would make sense to park our emergency fund (and even our war chest) in fixed deposits and not in OCBC 360 or UOB ONE. Why?
Well, after all, money in fixed deposits is slightly farther away compared to money in a savings account. Fixed deposits have locks.
1. How much should we have in emergency fund?
2. A special chest for emergency fund.
3. Getting paid more while waiting for opportunities.
4. UOB ONE or (new) OCBC 360?