Cash is king.– Said everyone
Well not really in a low interest rate environment.
Apart from gold, cash was another component in my permanent portfolio I had the most beef with. Although unlike gold, it does earn interest, but measly interest is nothing when its value is constantly eroded by wreckless central bank currency printing.
Cash has the lowest opportunity cost, which makes it good dry powder during a market rout. Assets can be bought with cash at a moment’s notice and comes with no liquidation expenses or delays.
Option 1: High Interest Savings Accounts
Before I start, remember that when you “deposit” cash into a bank account, the back is actually borrowing your funds to drive their fractional reserve lending business. Basically it’s borrowing your funds for the license to create more currency out of nothing.
Therefore, never accept anything less from them.
In the days before the likes of high interest savings accounts like DBS Multiplier, UOB One and OCBC 360, I had to rely on Philip’s Money Market Fund (PMMF). It is a cash equivalent that comes with zero fees, relatively high liquidity and slightly above 0% interest, which was considered good during that time.
Then came the OCBC 360 account. I was able to achieve 1.8% by crediting my salary (1.2%), paying 3 Giro bills (0.3%) and making a minimum spend of $500 on the OCBC 365 credit card (0.3%) every month. I didn’t go for the wealth products for an additional 1.2%, because I don’t believe they could do any better for my money than I can.
Then things got complicated on November 2018 when they removed the Giro bill bonus and implemented some complicated tiered bonus scheme on the existing components. I’m not going to grovel in the dirt for that.
So I switched to the DBS Multiplier account and was able to get 2.2% p.a. Best of all, there’s no pressure to hit a minimum spend.
- Salary credit and spend on POSB Everyday credit card (1.9%)
- Investment payouts credit (0.3%)
For item 2, instruct your CDP to credit any dividend or coupon payments to your Multiplier account. However, not all stocks or bonds issue payouts every month.
Here’s a hack to ensure you hit this monthly target. Simply buy the minimum of $500 worth of Singapore Savings Bonds (SSBs) for 6 months consecutively. Since SSBs have semi-annual coupon payments, this will ensure that, 6 months later, you will start having investment payouts to your account every month.
Option 2: Singapore Savings Bonds (SSBs)
SSBs are issued by the Singapore government every month, every Singaporean or Permanent Resident can own a total of up to $200,000 worth of SSBs.
They are easy to buy from any of the major banks via internet banking, only $2 per transaction, minimum of $500, and it only takes a month or less to transact. Finally their principal values do not fluctuate.
You can redeem any amount of SSBs in $500 units at any time. You will be credited that amount plus whatever interest earned, minus $2 in fees, the following month. Pretty liquid to me.
Option 3: BYOB (Be Your Own Bank)
Why borrow and pay banks the interests when you can pay them to yourself?
The idea came about because I was really pushing the limit of maximizing my savings. Paying myself first had really cut down the amount of leftovers for the month. So when it came to paying my whole life insurance’s annual premium, I realized that I had forgotten to factor that into my budget, a year after switching from monthly payments.
Here I am, sitting on a pile of cash in my permanent portfolio, but I am having problems paying my insurance premium.
I really hated to pull cash out from any of my portfolios. In fact, my variable portfolio was fully invested and it would be dumb to liquidate any of my holdings, especially when I had cash lying around.
Then it came to me. I had switched from paying a monthly premium of $467.35 to paying an annual premium of $5,402.70 — which saves me $205.50, or about 3.66% per annum. That’s a pretty decent return.
Considering that I had already been paying monthly for the last 4 to 5 years before the switch, it shouldn’t be an issue to switch back again — only this time, this gain is captured somewhere instead of letting it sneak quietly into lifestyle inflation.
If I used $5,402.70 of my permanent portfolio’s cash component to “invest” in my annual insurance premium, and received 12 monthly “repayments” of $467.35 back into the portfolio, this “investment” gains a 3.66% p.a. return. A 12-month bond is considered a viable option for the PP’s cash component, according to the book — only that this “bond” gave a much higher return than any AAA 12-month bond you can find.
Yes it will indeed be more stressful for me financially. But as I said, I had already gotten used to paying those monthly premiums for years before the switch. Theoretically, the extra savings should have been reinvested anyway.
As long as I am committed to having a job to keep my insurance, I present the absolute lowest counterparty risk.
Soon I was using this to “invest” in my SRS contributions as well. The “gains” represented by the amount of tax I would have saved for the year.
Theoretically, I could take a personal loan from the bank to contribute to my SRS to avoid the tax, but that would be stupid if I had to pay 9% E.I.R. on the loan to the bank to just save 7% in taxes. It is a different ballgame to borrow from myself, pay the principal back equally over 12 months, and earn the gains from the tax savings — starting from 7% (the point where SRS becomes worthy of consideration since penalty of early withdrawal is 5%).
On top of that, the money starts working once invested within the SRS.
Sure, we can’t escape death or taxes — but we can definitely convert taxes into savings.
This is how I’ve made peace with the cash component of my permanent portfolio.
“Be My Own Bank” presented a whole new dimension to maximizing those cash. But I have to remind myself not to get too carried away with self loans. Considering the cash is supposed to be dry powder in times of crisis with the other 3 components. My rule of thumb is to never borrow more than 25% of the overall portfolio from the cash component.
So far, those loans have only been used where real financial gains can be achieved. Not for any form of non-productive needs.
However just in case, to manage the risk of borrowing from myself, I have put up “collateral” from my shopping, vacation and gift funds should there be a need for early repayment or trouble with repayments.
What do you think of these ways of maximizing the permanent portfolio’s cash component? Share your thoughts below!