Many banks in Singapore offer their own version of a high-interest savings account. The more popular ones include the DBS Multiplier Account, OCBC 360 Account, Standard Chartered Bonus$aver, UOB One Account and there are others.
Having a high interest savings account helps grow our savings at a much higher interest rate than the 0.05% per annum we normally would receive. These high interest savings accounts are obviously not meant as an investment. Rather they allow us to earn decent interest on our emergency funds, investment “ammo” or even funds meant for our everyday expenses.
However, these high interest rates have been another victim of the COVID-19 economic crash. Interest rates globally have been slashed to help businesses access cheaper funds to tide over as well as encourage more investment from growth industries. Similarly, many of the high-interest savings account have implemented multiple rounds of downward revisions to their interest rates in 2020 itself.
Against this backdrop, there are several reasons why a high-interest savings account today may make less financial sense.
#1 The Lower Interest Rates They’re Offering
With interest rates being revised down, there’s less financial sense in keeping money in these high interest accounts. Instead of being able to earn about 3% or more in the past, we may only be able to realistically earn about 1% or less today.
This increases the opportunity cost of leaving our funds in these high-interest accounts.
Moreover, with the US Federal Reserve intending to leave interest rates at near-zero levels until 2023, the situation is not likely to improve. For all we know, the next downward revision might be around the corner.
#2 We Have To Jump Many Hoops To Collect Better Interest Rates
To earn the high interest rates on practically all of the high-interest savings accounts, we need to jump through multiple hoops. Apart from declining interest rates, some of these accounts have also revised their criteria to become increasingly harder to achieve over the years. Some of them include having to credit our salary, spend on credit cards, invest or buy insurance with them.
Hoops such as crediting our salary and even spending a reasonable amount on our credit cards can be achievable. However, many of these accounts now require us to hit certain levels of transactions each month or provide higher interest rates only if we deposit much more money in our accounts.
Certain hoops are entirely prohibitive, such as hitting an “investment” amount or having to purchase insurance with them.
Worst of all, after optimising our savings to hit a good interest rate, a new change could be implemented at any time to undo our effort. This is why it’s close to impossible for the majority of us to achieve the highest interest rates offered by these savings accounts in the first place.
#3 We Could Be Making Poorer Financial Decisions By Optimising Our High-Interest Savings Accounts
Some of the hoops we are forced to jump to optimise the interest rates we receive may not make sense for us either.
A high-interest savings account usually means we should lump our savings into one account. This simple action can already upset financial planning for many, who want to use different savings account for different purposes to separate their financial lives. This could be for a joint saving with their spouse, another account entirely dedicated to their investments and dividends, and another for their daily expenses.
Similarly, locking ourselves into an ecosystem of products may not lead to the best outcome for our finances either. For example, if we use the DBS Multiplier Account to save, we may want to invest in stocks or other investments offered by DBS as well. However, it could be more cost-effective to invest with another stock broker or other investment products.
In the same vein, we do not want to be locked using just one credit card. If we spend the bulk of our groceries at Sheng Siong, we should choose to use to BOC Sheng Siong card to optimise our savings, if we are into cash back, we may want to use the HSBC Advance Cashback Card to get a superior cashback.
If we want to buy insurance, we shouldn’t just lock ourselves to products from one insurer. Or worst, we shouldn’t choose to buy insurance for the sake of jumping through a hoop for higher interest rates on our cash savings.
#4 We Should Focus On Optimising Other Areas Of Our Life
Leading in nicely into this point, we may be better off spending our time and energy into optimising other parts of our finances that will pay off more handsomely. After spending so much time trying to earn our high-interest savings account, this can easily be undone by lower interest rates or more difficult to achieve hoops. Moreover, the maximum we can earn on these accounts is also capped at around 2% and slightly above currently.
If we spent the same amount of time optimising our investments, we could be much better off even if we earn a poor interest rate on our savings. For example, the highest tier of interest rates we can earn on high-interest savings accounts today is about 3% or even less. If we put our time and energy to find better investments, we may be able to beat this rate. Moreover, investments are longer-lasting as our returns compound. Whereas, banks have shown that they can and will alter interest rates and hoops as they see fit.
Other things we can focus on include a freelancing gig, starting a business or investing in property that will have a much bigger financial impact on our lives. Or even spending that time with our family.
#5 Other Ways To Save Cash And Still Earn Decent Interest Without Optimising
At the same time, this doesn’t mean that all of our cash savings have to suddenly earn 0.05%. Even without spending time and energy to optimise our high interests savings account, we can simply use products today such as a cash management account or an insurance savings plan.
Both do not require our savings to be locked in, while still giving us a decent interest rate. In fact, cash management accounts are able to pay us around 1%, while insurance savings plans are paying closer to the 2% range.
In fact, these products may even be more stable as they are more aligned with market rates. The high interest rates provided by banks are simply a way for them to push us into other types of products in their ecosystem.
We can simply put aside funds that we require slightly down the road or even our emergency funds into these accounts while keeping what we need for our daily expenses within low-frill savings accounts that do not charge unnecessary fees.
The only downside is the fact that we cannot withdraw our funds using an ATM instantaneously.
A High-Interest Savings Account Is Good To Have, But We Should Not be “Over-Optimising” It
We’re not trying to say a high-interest savings account is not useful. We’re just pointing out how it may not lead to superior outcomes in other aspects of our lives. This is why there’s no need to be too fixated on achieving the highest tier of interest rates.
What may be more practical is to use it for the purposes we require it for. Not be overly fixated on missing out on the best interest rate on offer. Instead, we can spend more time optimising the way we use other financial products and other areas of our finances.