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Why You Shouldn’t Keep All Your Money In The Bank

Ho Khinwai
Ho Khinwai

How many of you have heard the overused cliche that you need to “make your money work for you” and not simply leave it in the bank?

I have.

I’ve sat through countless seminars and workshops in the past couple of years where I have heard this phrase being thrown around.

They will give the example that a plate of chicken rice that costs $2.50 ten years ago now costs about $4… and this is due to “inflation” eroding the value of our money.

But, if you take a little initiative and check SingStat’s reported inflation rate for 2018, you’d be shocked to see that it is only at 0.4%?

How can this be? We know things are getting more expensive every year and our salaries are stagnating…

Could it be that 0.4% is the inflation rate for our salaries only? Hmm…

What is Singapore’s REAL Inflation Rate?

One common indicator used to calculate inflation rate is the Consumer Price Index (CPI). It shows how much a predetermined basket of goods and services cost over time. The annualized percentage growth thus indicate the inflation rate.

The reported (headline) inflation gave us 0.4%. What we should be also looking at is the MAS core inflation number – which comes to be 1.7%. This is a big difference of 1.3%!

This is as the MAS core number excludes rentals and transport expenditures. The reason is that the prices of these sectors may be artificially set and influenced by various government policies over the short term.

The trouble with inflation rates is that the time frame for calculating such a growth is extremely arbitrary.

Different time periods will show different inflation rates, assuming all else is equal.

In Singapore, the current inflation rate is calculated using 2014 as the base year.

The base years, along with a new basket of goods and services as published in the Household Expenditure Survey (HES), are updated every 5 years. This is done to more accurately reflect the different proportions of goods and services Singaporeans spend their money on.

To get a more accurate sensing of the “real” inflation based on what goods and services being increasingly consumed by households in Singapore today, we did up an inflation rate table below.

A few assumptions and explanations need to be made:

  • We used data from the MAS inflation calculator here, setting the base CPI year as 2014 and the current year as 2018
  • As the HES 2018/2019 report has not been published, we look for indications of increasingly critical sectors of expenditure from this 2019 Channel NewsAsia report.
  • We looked at the average annualized inflation rate, for ease of calculation
  • The rates shown are already adjusted for overall inflation levels. Thus, we should add it back to see the raw, unadjusted rate of increase from 2014-2018. To do this, we used the MAS Core Inflation Rate for 2018 of 1.7% to be conservative.
Sector-Specific CPI BasketInflation Rate (Adjusted for Core Inflation)Raw Inflation Rate

We see that raw inflation rates for critical goods and services hover in the 3-5% range. This is a more representative inflation range. For example, households would require more and more healthcare services in the future owing to an aging population.

It’s scary isn’t it?

With only a 1% interest rate on fixed deposits, a maximum average interest rate of 2.4% for Singapore Savings Bonds (SSBs), and with CPF accounts giving a maximum of 5% (barely equalling inflation)…

…Many Singaporeans are increasingly starting to realize they are in deep sh*t if they just passively keep their money in “traditionally safe” places like banks.

Such “safe” places aren’t so “safe” anymore… once you begin to see that your hard-earned savings are eroding value at 2-4% per year.

What Should You Do Then?

Ultimately, you want to park your money in a place where the rate of returns beat inflation. This means that whatever you put your money into must earn you 5% or more per year to be a worthwhile venture.

Some of the more popular choices:

  1. Start a Side Business or Gig
  2. Invest in Bonds, Stocks, Properties, or other Asset Classes that can yield 5% or more, on average
  3. Place in an Investment-Linked Product, Annuity, or an Endowment (savings) plan with a financial advisor

We think that Option 1 can give you high returns if you already have a hobby or passion that you are extremely skilled in and have marketed yourself well. Otherwise, it can be quite risky and you could lose your entire initial investment.

At Dr Wealth, we’re a little biased – we’re big fans of Option 2… particularly stocks.

We believe investing is one of the easiest ways to preserve and grow your funds safely.

We believe in the idea of “investing intelligently”. We make sure we have a framework to quantitatively and objectively assess our investments – and not let our psychological biases get in the way.

We have a preference for stocks because it is the easiest to understand (if you have a framework), and produces stable and inflation-beating returns over the long run.

One of Dr Wealth’s co-founders, Louis, has also documented the risks and returns for different kinds of investments. You can find the article here.

Lastly, we think that Option 3 is fine if you find it troublesome to invest on your own. However, the risk is that you won’t have control over what the fund or product is invested in – and you will have to accept the returns even if they do not beat inflation… as your money will be typically locked in with the plan.

Not a very intelligent move – if you ask me.

I like to know where my money is invested in, and get comfortable in the fact that I can move money in and out of my investments at any time.

So far, we at Dr Wealth have generated about 10-15% returns per year on stocks using a framework that allows us to invest intelligently. That’s a 5-10% per year growth on our money after accounting for inflation!

If you want to learn the exact process on how we made such inflation-beating returns, we organize an intro class every few weeks. Click here to find out when’s the next intro-course!