Now that interest rates for savings accounts are falling, where should you put your money?

Last week, UOB and Standard Chartered Bank cut the bonus interest rates on their flagship savings accounts. Will other banks follow suit?

SINGAPORE: Cash savers have been getting excellent returns in recent years, with banks dangling interest rates of over 7 per cent for savings accounts.

But with the latest rate cuts, one can’t help but ask: Are the good times coming to an end?

Earlier this month, UOB took the first step among local banks to announce cuts to its flagship One account's interest rates. From May 1, rates for the first S$100,000 (US$73,500) will be 3 to 4.5 per cent a year, down sharply from the current 3.85 to 7.8 per cent.

Standard Chartered Bank is also making a downward revision, albeit a smaller one. The maximum interest rate on its Bonus$aver account will be lowered slightly from 7.88 per cent to 7.68 per cent per annum from May.

For now, other banks have not announced any changes to their flagship savings accounts.

WHAT CAN SAVERS DO?

Just like how the flurry of interest rate hikes in late 2022 spurred some people to switch their bank accounts in search of the best deal, some are mulling if it’s time to make the switch, again.

As a first step, it is important to note that flagship savings accounts offer tiered interest rates that go up as customers grow their account balance, spend more on eligible cards and conduct other transactions with the bank such as taking up a mortgage or insurance plan.

This means that the highest advertised rates typically apply to only a fraction of one’s savings, and if certain conditions are fulfilled.

Take UOB as an example – the revised 4.5 per cent rate applies specifically to deposits between S$75,000 and S$100,000, and when account holders credit their salary to the bank and spend at least S$500 a month on an eligible bank card.

Average that out with the 3 per cent interest paid out to other tiers of funds, the effective interest rate for deposits of S$100,000 is about 3.4 per cent per annum.

For comparison, OCBC’s 360 Account pays up to 4.65 per cent a year on the first S$100,000 when customers credit their salary, save at least S$500 a month and spend with the bank. The rate goes up to 7.65 per cent for those who also invest and buy insurance through the bank.

At DBS, the Multiplier Account offers a maximum interest rate of up to 4.1 per cent a year for the first S$100,000 in deposits, if customers credit their salary to the bank and transact in three categories with a total volume of S$30,000 or more a month.

While other banks have yet to move, industry watchers do not think this will be the case for long as market expectations build up for the possibility of rate cuts by the US Federal Reserve this year.

Noting how the banks moved quickly in lockstep when raising interest rates, Phillip Securities’ senior financial services manager Elijah Lee said: “You just need one bank to move, and the others will likely follow suit.”

When that happens, the effort involved in switching savings account may not be quite worthwhile.

THE RISK OF OVERSAVING?

Another discussion on online forum Reddit focused on whether to put more money, specifically S$150,000, into UOB’s One account.

This is because while the bank lowered its bonus interest for the first S$100,000, it introduced two new tiers that offer as much as 6 per cent for those with more savings.

For example, account holders will earn 4.5 per cent interest on S$25,000 after the S$100,000 mark. The rate goes up to 6 per cent for the next tier of S$25,000. Both interest rates are up from the existing 0.05 per cent.

This means that the effective interest rate for a customer with S$150,000 in deposits comes up to 4 per cent.

“To be honest, 4 per cent is not bad but always think about the hoops that you have to jump through for that,” said Mr Lee.

“If you are going to force yourself into something like taking up a new card and spending more, please take a step back and ask yourself if the increased interest is worth the additional steps you need to take.”

It is also important to note the opportunity cost that comes with squirrelling away too much in a savings account.

As Assistant Professor Aurobindo Ghosh puts it: “Saving early is a very good habit but saving and putting everything in a savings account might not be a very good habit.”

While having easily accessible funds in a savings account can provide peace of mind, it may not be the best option to keep up with inflation in the long run.

The key is hence identifying an appropriate amount to be set aside as emergency savings.

Asst Prof Ghosh from the Singapore Management University (SMU) reckons this to be three to six months of income.

Mr Lee from Phillip Securities prefers to have 12 months of living expenses as an emergency fund in case of a longer-than-expected job hunt.

This, he added, can either be kept in a savings account or split up in other safe and fairly liquid instruments such as the Singapore Savings Bonds.

For example, the latest tranche of the Singapore Savings Bonds is offering a first-year interest rate of 2.99 per cent and a 10-year average return of 3.06 per cent.

The popular Treasury bills (T-bills) offer better rates of about 3.7 to 3.8 per cent, but liquidity can be an issue for these short-term tradable debt securities given few interested market buyers. In that case, investors will have to wait six months for the government security to mature, Mr Lee said.

Regardless, both experts recommended individuals to decide on an ideal emergency fund size based on their circumstances, such as age and family situations. After which, invest the rest.

Again, there is no hard and fast rule on how one’s investment portfolio should look like, as this differs based on financial goals, risk appetites and investment time horizons.

“There is no formula to tell people to invest in this or that, but if you are starting out, start with baby steps,” said Asst Prof Ghosh, who is also the director of the Citi Foundation-SMU Financial Literacy Program for Young Adults.

Those new to the market could start with exchange-traded funds, a type of pooled investment fund that seeks to track the performance of a market index like the S&P 500.

Otherwise, they could invest with small, specific dollar amounts regularly – a technique otherwise known as dollar-cost averaging.

“You don't have to go all the way, but you have to start getting into the habit of investing,” said Asst Prof Ghosh.

“When you buy something, you see or use it every day and you recognise that there is a utility for it. But when you're investing, you are taking the money that you would probably have used to buy a bag or some shoes. It's like you're spending on something, but you don't see it.”

Asst Prof Ghosh recommends thinking of investments as “lending your future self some money”.

“With careful decisions, it will be something that your future self will thank you for.”