The year-end is approaching, and now is as good a time as any to review your financial health, as our DollarsAndSense writers Angela and Dinesh did with a comprehensive financial review. It is also a time when you may have saved money over the course of the year or will be receiving a lump sum payment in the form of a year-end bonus.
Assuming you have $8,000 in spare cash (it could be more or less) and would like to invest this amount instead of spending it on a holiday, these are some of your options.
Top Up CPF Account Under The Retirement Sum Topping-Up (RSTU) Scheme
More Singaporeans have voluntarily made top-ups under the retirement sum topping up (RSTU) scheme to either their own or their loved ones’ retirement savings in 2022 than in previous years. The CPF system embodies the virtues of compound interest and low investment risk in building up one’s retirement savings through their Special Account (SA) or Retirement Account (RA).
This is a good option to consider when investing your $8,000, especially if you have not reached your full retirement sum (FRS) of $192,000. You would not only get the minimum interest rate floor of 4% per annum (p.a.) on your savings but could get a dollar-for-dollar tax deduction of up to $16,000 when making a RSTU cash top up to your and your loved ones’ retirement accounts.
How Much Can You Earn:
If you’re under 55, you would be able to earn up to 5% interest p.a. on the first $60,000 of combined CPF balances (capped at $20,000 for Ordinary Account). This translates to a return of between $320 and $400 for an $8,000 investment in your SA.
If you’re over 55, you could earn up to 6% p.a., which is capped at the first $30,000 of combined CPF balances (capped at $20,000 for OA) and up to 5% p.a. on the next $30,000 (capped at $20,000 for OA). This allows you to earn up to $480 per year in interest returns in your RA.
Contribute To Supplementary Retirement Scheme
Another government scheme that is meant to encourage individuals to voluntarily save for retirement above their CPF savings is the supplementary retirement scheme (SRS). Singaporeans and permanent residents can get tax relief for every dollar they put into the SRS, up to a maximum of $15,300 per year—or $35,700 per year for foreigners—up to a personal income tax relief cap of $80,000.
The cash contributions made to your SRS account can be used to purchase various investment instruments like Singapore Savings Bonds (SSBs), Singapore Government Securities (SGS bonds), stocks, unit trusts, and insurance products. The advantage of using the SRS is that your investment returns are accumulated tax-free, and only 50% of withdrawals from the SRS are taxable at the retirement age of 63 (effective from 1 July 2022).
How Much Can You Earn:
Depending on your income and other eligible tax reliefs, the tax savings from contributing to SRS may differ. For example, using the IRAS Income tax calculator, a 30-year-old with an annual income of $50,000, assuming no other personal tax reliefs, could save $560 with an $8,000 contribution.
Instead of keeping the $8,000 investment in the SRS as cash, which would only yield 0.05% p.a. or $40.15 in interest, you could invest in other high-yielding investments. Due to the current high interest rate environment, you can currently invest in government bonds like the SSB [GX23010Z – 3.26%] and Treasury bills [BS22123S – 3.9% p.a.] at attractive yields.
If you have a longer investment horizon, you can take more risks by putting your money into individual stocks, ETFs, or unit trusts, which could give you higher returns, though they come with greater volatility.
Invest In Low Volatility Cash Management Accounts
If you’re intending to keep your savings for short-term needs, then you may hold your $8,000 savings in high-interest-bearing savings accounts like the DBS Multiplier, which gives up to 4.10% p.a., the OCBC 360, which gives up to 7.65% p.a., and the UOB One, which gives up to 7.8% p.a.
While these accounts give you a higher interest rate on your savings, you may be required to fulfil certain conditions, such as a minimum additional spending in different categories, in order to qualify. Nevertheless, even if you do not fulfil all the conditions, you could still easily earn more than the standard rate (0.05% p.a.) on regular savings accounts.
Alternatively, you could also consider switching to savings accounts like the CIMB StarSaver, which earns you an interest rate of up to 3.50% on your regular savings without any investment limit. These options allow you to grow your investment with low risk and without any lock-in period.
Cash management funds are another option for either short-term investing or seeking shelter from current market volatility. In a rising interest environment, short duration bond funds are able to capture the higher rates as the (lower-yielding) maturing bonds are reinvested into higher-yielding bonds.
How Much Can You Earn:
This depends on the cash management fund that you select, which can be above 3% p.a. or more, and on the promotions offered. For instance, by investing $8,000 in moomoo Cash Plus, for 3 months you could get up to $98.90 in guaranteed rewards and a further $20 in cashback on the (limited-time) promotions alone.
Lump Sum Or Dollar-Cost Averaging (DCA) Into Equity ETFs
Stock markets around the world have seen large volatility in 2022 due to geopolitical tensions, supply-chain disruptions, and rising interest rates. As a result, investors may shun equities in favour of safer instruments like short-term bonds or fixed deposits.
However, the equity market has a better potential to generate higher returns, which are also able to beat the rate of inflation over the long term, than these safer instruments. One way to stay invested in the equity market is through equity exchange-traded funds (ETFs) like the SPDR Straits Times Index ETF (SGX:ES3) and SPDR S&P 500 ETF (NYSE:SPY).
Investing in these equity ETFs with $8,000 can be done in two ways: you can invest it all at once (also known as lump sum investing), or you can split it up and invest about $650 per month using the dollar-cost averaging (DCA) method.
How Much Can You Earn:
With a possible recession looming in 2023, you may consider investing using the DCA approach, which may generate a better return when there is significant market volatility. However, if you believe the markets will recover and move upward, you could choose the lump sum approach, which would be better in an uptrending market.
The table below shows the returns for the two ETFs—SPDR STI ETF and the SPDR S&P 500 ETF—based on their respective base currencies.
|Fund||1 Year||5 Year||10-Year|
|SPDR STI ETF||0.30%||8.89%||39.37%|
|SPDR S&P 500||-14.67%||10.29%||12.64%|
Pay Off Housing Loan
For most Singaporeans–in a country with a high homeownership rate–our primary place of residence is also our biggest investment. This is not surprising given the high property prices even for public housing, which has seen a record number of HDB resale flats breach the million-dollar mark in 2022.
The previous decade of low 1% p.a. interest rates may have encouraged more HDB homeowners to take bank home loans instead of HDB housing loans. Even private homeowners may have liked floating interest rate packages more in the past than fixed interest rate packages.
But, with interest rates rising sharply to above 3% p.a. for the floating rate packages and above 4% p.a. for the fixed rate packages in 2022, homeowners who are close to the end of the commitment period would be facing higher borrowing costs.
You could consider making a partial prepayment and saving on the (rising) interest costs if your home package allows for it. After all, a penny saved is a penny earned!
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