Part 2: Simple methods to grow your Savings

This is part 2 of a 3 part series on Smart Money Series.

Someone once shared with me his savings methodology: "By not spending, I am already saving!" Not sure if it makes sense to you, but I am sure this is how some of the less financially savvy lead their lives.

Many of us tend to spend whatever we earn or more. Even though we knew the importance to save for unexpected emergencies or major life changes, but we just can’t seem to put some cash away.

In part 2 of the series, I will be sharing some simple methods to grow your savings. As the next part of this series will be touching on Wealth Management (Insurance & Investments), I will restrict this topic only recommending basic saving (deposit) methods available to all of us. Let’s take a look first at the types of savings instruments available:

1. Piggy Bank
2. Savings Account
3. Internet Savings Account
4. Interest-Bearing Current / Checking Account
5. Fixed Deposit
6. Foreign Currency Deposit

Piggy Bank was what I used to start my personal savings with when I was a kid. Even though my peers were fascinated with “saving stamps” I would save at least half my allowance in my little piggy bank every day.

After a sudden windfall (I scored 4A in my PSLE, I was rewards $400 from mum), I opened my first savings account. In those days, savings account does not have “fall below” fees. My savings quickly accumulated and four years later, I was ready to start a 1yr Fixed Deposit with an amazing interest rate of 6.375%p.a.!

My savings methods did not change until I started working in the financial industry some years ago. It was when I was introduced to a variety of new savings instruments like interest-bearing checking account, internet savings account and foreign currency deposit.

Today, I have small sums of money in each of the above instruments. Like the saying goes: “Never put all eggs in one basket”

My Recommendations: Family A

In theory and actual practice, we should have set aside liquid assets (e.g. cash in savings account) valued at least 3 to 6 times our monthly expenses for emergencies (e.g. due to involuntary loss of income). This can be in the form of normal savings or fixed deposit. With 25% of their gross income going straight into expenses, this should work out to at least $3750 (for 3 months survival).

Since both husband and wife are working, they should set aside 10 to 15% of their monthly income to a “Marriage Fund” while keeping separate transactional (savings or checking) accounts on their use. The aim of this fund is to set common financial goals for the couple on their journey to a lifetime commitment.

For a start, the method of saving for this “Marriage Fund” can be in the form of a Fixed Deposit (can be in local or foreign currency), Interest-bearing current account (some banks pay better interest than basic savings account) or Internet Savings Account (which pays you relatively higher interest; provided you are web savvy).

The reasons for putting the “Marriage Fund” in a:

Fixed Deposit (can be in local or foreign currency)
- Higher interest than basic savings account
- Discipline savings (money locked away for a period of time)
- Foreign currency FDs can hedge against exchange risks (and they usually pay much higher interest than local currency)

Interest-bearing current account
- Some banks give higher interest than basic savings account
- Free cheques issuance with ATM access
- Convenient withdrawal when liquidity needs arises

Internet Savings Account
- Usually no minimum maintenance required
- Ability to check account balances anytime.
- Savings from this virtual account passed onto account holders as a form of higher interest

BONUS TIPS:

Honeymoon:
Should the couple have decided their honeymoon destination, they could hedge against exchange rate risk and enjoy higher returns by placing some money in their choice of foreign currency deposits (can be in the form of savings account or FDs).

Saving for a car:
Although this is what I did not recommend during my last posting, I felt obligated to help. Besides having a “Marriage Fund”, the couple should start budgeting on the car they are looking for. Set out a target date to their dream car purchase. Select choice of saving method with a reasonably assumed savings interest. Using “Time value of money” methodology, they should be able to work out a monthly savings plan which suits their savings habit.

But I still feel taking Taxi is going to be more economical. :P

My Recommendations: Family B

Similar to Family A, we should begin the process by setting aside liquid assets valued at least 3 to 6 times our monthly expenses for emergencies (e.g. due to involuntary loss of income). With 30% of their gross income going straight into expenses, this should work out to at least $7200 (for 3 months survival).

As Unit Trust is considered quite liquid, the above rule of thumb can be considered as met.

Besides having a “Marriage Fund”, I would advocate a “Child’s Growth Fund” for each of the 2 kids. The aim of this additional fund is assist the children to kick-start their own savings habits from young.

As mentioned earlier, I started my savings regime when I was very young. I was also taught to study hard in order to get rewarded (monetarily). Apart from joint savings account with parents, children can now park their savings in accounts specially designed for the young:

“Child’s Growth Fund” (Junior Savings Account)
- Higher interest than basic savings account
- Discipline savings (can be arranged using GIRO)
- Free Insurance Coverage (some are available for both child & parent)
- Participate in free workshops and activities organized by the banks

BONUS TIPS:

On Husband’s Business Needs:
Due to business requirement, husband may need a checking account for transactional purposes. Most corporate accounts come with checking facility. However, the requirement on account minimum balance maintenance can be quite irritating. Also, cheque books provided may not be free (let alone unlimited).

Choices available:
1. Open a personal savings account with checking facility (lower requirement on minimum balances)
2. Open a personal interest-bearing checking account (lower requirement compared to corporate account)
3. Apply for a Credit Line facility which pays interest on credit balances (look out for those with low annual fees) - if possible; may have constraints due to self-employment status

Saving for a car:
Set budgeting on the car they are looking for. Set out a target date to their dream car purchase. Select choice of saving method with a reasonably assumed savings interest. Using “Time value of money” methodology, they should be able to work out a monthly savings plan which suits their savings habit.