How does the savings calculator work?
Depending on the selected financial product, an average interest rate is applied to calculate the total interest you can expect to receive over the duration of your savings. The interest is compounded on a monthly basis, as your savings increases on a monthly basis.
Refer to the writeup below on real-life applications and the interest rate used for each of the financial products.
Interest rates for savings accounts in Singapore
In Singapore, the typical base interest rate for savings accounts range from 0.05% to 0.2% p.a. Deposit above a certain amount ($50,000 and above) may allow you to get a higher base interest rate of up to 0.45% p.a.
Some bank may also have step-up or multi-tier savings accounts that offer interest rates of up to 3% p.a. However, conditions such as minimum debit card spending, taking up insurance or investment plans are usually required to unlock the highest interest rate tiers. Such rates may not be permanent (1 year of the higher tiered interest rate for taking a new plan) and/ or have a cap on the savings amount that is entitled to enjoy the higher interest rate.
- Product risk: Low
- Savings accounts are good for: Short-term holding (less than 1 year), emergency funds, transactional funds, etc
For the purpose of a general calculation, the savings calculator used an interest rate of 0.25% p.a. for savings accounts rates in Singapore. Your principal and interest are usually guaranteed, barring default by the bank or other exceptional situations.
Interest rates for fixed deposits in Singapore
Fixed deposit in Singapore usually ranges from 0.4% to 1.5% p.a, depending on the length of your deposit. The rates for longer tenors (above one year) are not compounded, hence you receive the per annual interest rate based on your principal deposit.
- Product risk: Low
- Fixed deposits are good for: Holding period of 1 to 3 years, where funds are definitely required for other purposes such as housing or other fixed financial commitment.
For the purpose of a general calculation, the savings calculator used an interest rate of 1.2% p.a. for fixed deposits rates in Singapore. Your principal and interest are usually guaranteed, barring default by the bank or other exceptional situations.
Interest rates for insurance plans in Singapore
The financial returns for insurance plans can range from 2% to 4.5%. The overall rate of return is highly dependant on the premium term and policy term. In general, a shorter the premium term and a longer policy term will typically yield the highest financial return on insurance plans.
- Product risk: Low-Mid (Depending on time horizon)
- Insurance plans are good for: Insurance savings plans offer certainty and reasonable yield for holding period of 10 to 25 years. Insurance retirement plans offer stability and a fixed stream of income upon your desired payout age.
For the purpose of a general calculation, the savings calculator used an interest rate of 3.25% p.a. for insurance plans rates in Singapore. Most insurance savings plans are principally guaranteed and interest may consist of a mixture of guaranteed and projected amount, barring default by the insurer or other exceptional situations.
Interest rates for investment funds (Based on a portfolio)
An investment portfolio will consist of a basket of assets mainly in fixed income, equities and alternative asset classes. Your long term projected returns can range from 3% to 8%, depending on your risk appetite and time horizon.
- Product risk: Mid to High (depending on asset classes and time horizon)
- Investment funds are good for: Long-term wealth accumulation where market volatility does not affect the investor. As fluctuations may go as high as 50% -70%, it is not advisable to put your entire life savings into investment funds.
For the purpose of a general calculation, the savings calculator used an interest rate of 5.5% p.a. for investment funds returns in Singapore. Your principal investment, dividend, projected returns are neither fixed nor guaranteed.
What is the best way to get higher interest on savings?
The rate of financial returns or returns on savings is dependant on your time horizon and the risk (savings principal) that you are willing to undertake.
It is impossible to have the best of all three ( high financial returns, low time horizon and low financial risk) as they are fundamentally incompatible. Choose the two quality that matters the most to you and compromise on the last item.
Understanding your time horizon
Break down your savings needs for specific financial goals such as – New car, dream holiday, dream home, retirement income or other savings needs. The best product to maximise your returns depends on the time horizon you set aside until the funds are needed.
Case in point – In the long-term, a savings account will not yield you sufficient returns for retirement income as inflation will erode any earned interest. Whereas, an investment fund may not be ideal for a lump sum downpayment in the near future as market volatility may result in a major loss of principal during withdrawal.
Understanding your risk appetite
Certain non-urgent goals such as your dream holiday may allow you to take higher risk for higher potential returns. If you end up with more money than required, you get your perfect holiday with extras to spare. Even if there is a shortfall, you can still achieve your holiday goals with lesser luxury.
However, fixed commitment or retirement income may require higher stability and certainly as a financial shortfall may leave you in an uncomfortable or awkward situation.
Understanding your financial returns
Who doesn’t wish to achieve the highest financial returns in the shortest period possible with the lowest risk? However, such promises are either an outright scam or involve risks that you may not even be aware of.
A realistic approach is to set aside a reasonable time horizon that allows you to achieve your financial returns at an acceptable level of risk to you.
An ideal scenario is where you have a long time horizon and is able to stomach the financial risks and market volatility. While higher risk may not equate to higher returns, a longer time horizon and taking higher financial risks may potentially provide the highest return on your savings.
How should you allocate your savings for long term financial returns?
When it comes to financial planning, the general consense would be to spread your savings over a range of assets class and financial products. This is how we would suggest using the various financial products to enhance the financial returns on your savings:
- Savings Accounts – Set aside your emergency funds in savings accounts for liquidity
- Fixed Deposits – Allows you to get a higher return on your savings that will be required within a three years time horizon
- Insurance Plans – Accumulate stable long-term returns on your regular savings that are required at a fixed date in the far future.
- Investment Funds – Potentially achieve above market returns in a portfolio of investment assets. Prepared to hold for long-term or
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