The Lowdown on Low Rates

An amendment to my previous post (thanks Sharon!) – just found out that DBS/POSB slashed their interest rates to a pathetic 0.05% for their regular savings accounts, and 0.2%-0.25% p.a for a MySavings account. To give you an idea about how painful that is, consider that $1,000 saved at a 0.05% interest rate, compounded monthly for 10 years, would give you a grand total of …. $1,005. Owtch.

It’s actually hardly surprising that banks are cutting their rates to pretty much zero in light of the current economic environment. And while I could bore you with my thoughtful analysis of why interest rates are near zero, (peppering my speech with words like “current economic environment”), I’ll just give you the lowdown on what you should, and should not do.

What you SHOULD do:

1. Stick to your guns. You’re not going to get rich just by saving, but good saving habits are the first step to getting your ass out of the poor house. Just like how the first step to losing weight is to STOP EATING THOSE DAMN TASTY MCDONALD’S BURGERS, the first step to getting rich is to stop spending your money on useless crap. Your account, while not earning very much in interest, serves as a protective commitment device to prevent you from making stupid spending mistakes. There’s a certain psychological advantage in keeping your saved money separate from the account meant for your daily expenses: you’re less likely to spend it.

2.  Use your account as a short-term savings account, saving for large expenditures that are less than a year away. This is actually what I primarily use my POSB MySavings account for – so I always have a stash that I can spend on vacations, parties, gifts, weddings (not mine), and random weekend trips, absolutely guilt-free.  Get your system to keep shoveling $100 into your savings account every month, and at the end of the year you’re likely to have enough moolah to spend lavishly on Christmas, or reward yourself with a trip.

3. If you’re a savvier saver, you could possibly look into some insurance-linked savings plans, CDs, bonds, etc. But I’ll blog more about those another day. But if you’re going down this route, be damn sure that you don’t need the money within the next 5 – 20 years. (what about your house? or wedding? or investments?)

(Side note: I have a separate long-term savings account, earning a higher rate of interest where I park most of my money that’s not meant to be splurged within the year. But I’ll talk more about why the hell I bother to maintain three bank accounts in another post)

What you SHOULDN’T do:

1. Don’t be tempted to switch to another bank offering an interest rate that’s 0.02% higher than the one you’ve got. Honestly, it’s not worth the trouble. Your subway ride to the other bank is probably going to cost you more than the additional interest you’re going to earn. Interest rates are constantly adjusted by banks. They’re low now because all the other banks’ rates are low. When the Federal Reserve in America decides to raise their interest rates, the rest of the world will follow suit and your bank will be forced to raise its rates in order to keep its customers. So hang in there.

2. Don’t be tempted to dump all your savings into some foreign currency term deposit. I’m seeing lots of ads these days touting everyone to convert their Singapore dollars into Australian dollars, offering interest rates of 5% and above. Sure, you could possibly make some money if you’re willing to take some risk, but don’t be fooled into thinking it’s risk-free just because it’s a term deposit. If the Australian dollar falls against the Singapore dollar, you could actually lose more than what you earned in interest. I learned this the hard way back in college when I transferred most of my savings to my US bank account, only to see the Greenback fall spectacularly by like 30% or something. (Luckily, I was too drunk to notice).

In short, it sucks for savers that interest rates have fallen, but don’t let that steer you away from your plan. Saving is just one part of the equation – it prevents you from spending on dumb things, and it’s a necessary prerequisite for all that other good stuff that WILL make you rich. Keep it steady!