Thursday, October 9, 2008

Fix deposits 2

Just in case those people who are lazy to go read up from the previous post, finatiQ is still a bank. Your deposits that you put there are insured under the deposit insurance act, which I believe is $20,000. I.e if the bank were to go bankrupt like those in the US, you will at least get back $20,000.
This act also applies to all Singapore banks in Singapore..i think, or at least it applies to those that we commonly see, like UOB,POSB,DBS, OCBC etc.

Ok now to explain why people should at least put your unused $$ in fixed deposits rather than leave it lying around in your normal bank account. Lets give a simple scenerio. For example you have $20,000 at the age of 30. And decide not to do anything with the $$ till 60.

At End of 30 years, at the average normal interest rate of a saving account of 0.25%
you get: $20,000 x (1.0025)^30 = $21555

At End of 30 years, at an average interest rate of of 3% ( this is the conservative estimate because on average the risk free 10 year Singapore government bonds have an average of 3% already)
you get: $20,000 x (1.03)^30 = $48,545

Difference of $48545-$21555= $26990

As you can see, for just making the effort to do this risk free investing, you can get an extra of
of $26,990!!

Frankly the normals savings interest is peanuts...your $$ is rotting there due to inflation. You should at least leave it in non-fixed bank accounts that gives higher interest rates. Yup, its true, there are actually bank accounts with savings interest rate double of that of POSB. I will come more to that after my discussions on fixed deposits.

*Just to simulate with the finatiQ's 1.6% interest for 30 years
you get: $20,000 x (1.016)^30= $32198
this still is $32198-$21555= $11343 more than leaving it in a savings acocunt.

As you can see, in the current economy, the interest rates are not very good, its below the average. Hence if you feel that interest rates will rise, DO NOT dump ALL your cash into a much longer term fixed deposit just because it it gives a measly 0.1% more than a short term one. Go for a shorter term fixed deposit and when it matured, you can transfer it to another fixed deposit that has a higher interest rate. In my opinion, short term refers to 6-12mths. Anything longer is long term.

Every little bit of effort you put into investing your $$ goes a long way, especially if you are young. The time factor works to our advantage.

3 comments:

Emmeline said...

hey choo. very practical insights.
just for ur info, what u have considered in the 2nd last paragraph is reinvestment risk and interest rate risk. to decide how long term ur investment shd be also depends on the individual's investment horizon. u need to consider what is that money u are saving up for and when u need to use it. yups. anyway, go take an elective in Financial Management or Wealth Management. =) think u will like them!

Mozart said...

For fix deposit, I think it still won't cover the inflation. However, at least putting into the fix deposit will reduce the net inflation on yourself. Think of it this way:

Comparing the values of $100 today
today-$100 -> 2010-$110

if you keep $100 cash
today-$100 -> 2010-still $100

In bank with fd 5% 2years interest
today-$100 -> 2010-$105

Inflation rate without fd: 10%
Inflation rate with fd:
5/105*100=4.76%

Daniel Choo said...

To Jun han: yup u're right. Inflation eats away our money and we should consider that in the computation of the 'real' money left after 30years. I.e the actual value of the money, which is the same as the buying power of the money.
I shall discuss it on another post some other day.
Thanks!